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 April 17, 2002. Certain text contained within the transcript
has been bracketed because it was inaudible.
In connection with the proposed transactions, on March 18, 2002, General Motors
Corporation ("GM"), HEC Holdings, Inc. ("Hughes Holdings") and EchoStar
Communications Corporation ("EchoStar") filed 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 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 filed on March 18, 2002, 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 preliminary consent solicitation statement/information statement/prospectus
filed with the SEC on March 18, 2002 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
April 15, 2002
1:00 pm CT
Operator: Good day everyone and welcome to today's Hughes Electronics
Corporation 2002 First Quarter Earnings Results Conference Call.
Today's conference 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, sir.
Jon Rubin: Thank you, Operator and thank you everyone for joining us on our
First 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 in Latin America,
Pradman Kaul, Chairman and CEO of Hughes Network Systems, Pat Doyle,
our Controller and Treasurer and the CFO's of our major businesses.
Before we proceed, I'd like to remind you that our 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'd like to turn the call over to Jack Shaw for a few opening
comments.
Jack Shaw: Thank you, Jon. As you probably saw on our earnings release we
have a lot of information to share with you today. So I'd like to take
a moment to briefly comment on HUGHES first quarter results.
When looking at our First Quarter Operating Results, I conclude that
the underlying performance of our businesses is strong and consistent
with the goals we had shared with you on prior calls. I'm particularly
pleased to see that DIRECTV's economic model continues to improve and
demand for DIRECTV in the United States remains extremely robust. In
fact, I was happy to learn that we had our best ever first quarter in
terms of gross adds.
It really seems as if our new programming packages and retail offers as
well as ever-increasing word of mouth advertising from our large
customer base continues to drive demand for DIRECTV. I'm even more
pleased to see that all of the hard work devoted to shrinking our cost
structure and operating more efficiently is starting to pay off. This
is best demonstrated by DIRECTV's EBITDA in the first quarter, which
met its target even though we signed up many more new subscribers than
anyone expected.
In addition to the strong subscriber and EBITDA numbers, you will hear
from Roxanne in just a few moments that DIRECTV's revenues, churn and
margins also came in at or better than our expectations. It gives me
great pleasure to see this kind of performance from DIRECTV.
We also had strong first quarter results at PanAmSat, which attained an
EBITDA margin of 73%, its highest level since 1999. I'll be brief with
my comments on PanAmSat since I realize many of you listened to their
first quarter call last Friday.
And Hughes Network Systems, or HNS, put up solid numbers while winning
several large contracts in their enterprise broadband business and
helping DIRECTV meet its strong demand by shipping 430,000 DIRECTV
Set-Top Receivers.
The news in the quarter was not all good, however, because we finally
got our arms around the impact of the Argentinean currency devaluation.
As you know the economy in Argentina is very volatile and the
2
devaluation of the peso directly impacts our DIRECTV Latin American
operations resulting in a first quarter loss of $32 million.
I'm sure you also noticed that we had several unusual items in the
quarter. In a moment, Mike will spend some time helping you understand
these a little better. From my perspective, the unfortunate part about
these one-time items is that they tend to blur the progress we've made
in our core operations.
During this call, one of the themes you will hear about today is how
we're trying to simplify and clarify our communications while also
increasing the transparency into our key value drivers. For example,
beginning with this quarter's earnings release, we're providing new
data related to the key financial metrics for DIRECTV US. This is in
response to requests from many investors and analysts and we hope that
this type of information will help you better understand our
businesses.
Before turning the call over to Mike, I'd like to provide you with a
quick update on our financing and on the merger with EchoStar. Last
month, we successfully completed the financing of our 2002 funding
requirements. The final tranche of this financing was a $765 million
loan that was substantially over-subscribed. In my opinion, this strong
demand is further validation that HUGHES is on the right track. In a
moment, Mike will give you more color on our overall results and
balance sheet.
And, finally with regards to our merger with EchoStar, we are
continuing to provide data and respond to various requests by both the
Department of Justice and the Federal Communications Commission. As you
may have read in the papers a few weeks ago, the FCC requested
additional information and suspended its self-imposed 180-day deadline
for completing its review of the merger until we, along with GM and
EchoStar, complete this data request.
We are working diligently to respond to all of the pending FCC requests
and we expect to have it wrapped up within a couple of weeks. However,
we wouldn't be surprised to see the FCC continue to ask for additional
3
data. In general, I would say that the regulatory process is proceeding
as expected and we continue to believe that we will receive regulatory
approval by the fourth quarter.
In wrapping up my comments, I'd like to give a special thanks to all of
the HUGHES employees who, to a person, have performed brilliantly
during these extremely challenging times. I believe that the results
over the past three quarters provide the best evidence of all that
HUGHES is totally focused on improving operations and completing the
merger process to unlock our store of value for the GMH Shareholders. I
think you can see a clear pattern developing and understand that this
is a management team that understands its priorities and will deliver
on its commitments. With that, I'll turn the call over to Mike.
Michael Gaines: Thanks, Jack. Let me start with a quick overview of our
financial performance. In a moment, our business unit leaders will
provide a detailed discussion of revenue and EBITDA results for their
respective businesses. So I'll just comment on the consolidated HUGHES
results.
HUGHES revenues for the first quarter came in at more than $2 billion,
which is nearly 8% higher than the first quarter last year. And our
EBITDA was $134 million vs. $113 million last year. Our primary driver
of our revenue and EBITDA growth continues to be the improving
operating performance at DIRECTV US.
Included in our results for the quarter are some unusual items and I'd
like to take a moment to describe them. The first is a $95 million
EBITDA gain resulting from a favorable court ruling related to a decade
old lawsuit filed against NASA. The lawsuit was based on NASA's breach
of contract to launch ten satellites on the Space Shuttle. We've been
informed that the government plans no further appeal, so we are booking
the gain now, net of legal fees. This gain is included in the income
statement on the selling, general and administrative expenses line.
Additionally, in the Direct-to-Home segment, we recorded an $83 million
charge related to losses associated with a contractual dispute with
General Electric Capital Corporation or GECC. Fifty-six million dollars
4
of this loss is included in EBITDA and is reported on the income
statement on the SG&A line. This dispute dates back to a 1995 agreement
whereby GECC established and managed a credit a program for consumers
who purchased DIRECTV equipment and programming. In July, 2000, the
Jury returned a verdict in favor of GECC for $133 million and the trial
Judge issued an order granting GECC and additional $49 million in
interest penalties.
While we're appealing both the Jury verdict and the interest penalty,
we have taken an additional charge of $83 million for potential losses
based on our current assessment of the case.
And, as Jack mentioned, we also had a $32 million EBITDA loss at
DIRECTV Latin America due to the devaluation of the Argentinean peso.
Kevin McGrath will provide more insight regarding this devaluation
later on the call.
Also during the quarter, HUGHES recorded a $29 million loss related to
a guarantee of $52 million of bank debt owed by an investor in an HNS
affiliate in India. The $29 million charge represents the amount of
HUGHES potential obligation under the guarantee, net of anticipated
loan and collateral proceeds. This is recorded on our income statement
as "Other, net" and does not impact EBITDA.
Given the current market environment and the sensitivity surrounding
this particular topic, I want to address the HUGHES situation with
respect to off-balance sheet guarantees. As disclosed in our 10-K,
excluding the guarantees for the HNS affiliate in India that I just
discussed, the remaining amount of debt guaranteed by HUGHES is under
$20 million and we do not expect to perform on these remaining
guarantees.
Now, let's review HUGHES Balance Sheet and liquidity position. As of
the end of the first quarter, our cash balance was about $1.1 billion,
which is more than $400 million higher than the balance as of the end
of last year. Total debt was nearly $3.4 billion, which increased more
than $700 million during the quarter. The major uses of cash in the
quarter were for satellite and capital expenditures as well as the
final payment of $134 million relating to the purchase price adjustment
with Raytheon.
5
During the quarter, we completed a series of financing transactions
that provided the company with significant new liquidity. As part of
the financing, PanAmSat raised $2.05 billion in new bank debt and
long-term notes, most of which was used to repay the $1.725 billion
loan that HUGHES extended to PanAmSat back in 1997.
In additional to providing increased liquidity to HUGHES, this
repayment allowed HUGHES to access a credit line arranged with General
Motors Acceptance Corporation that provides $500 million of new
financing.
Also during the quarter, HUGHES completed the restructuring of its
credit facilities. Our prior $750 million revolver, which we had
completely drawn at the end of 2001, was amended to increase in size to
more than $1.2 billion. At the end of the first quarter, no amounts
were outstanding under this line. The various credit facilities
associated with DIRECTV Latin America businesses were repaid in the
first quarter. And as Jack indicated earlier, the new revolver was
supplemented with the placement of a $765 million dollar institutional
term loan last month.
After completing these transactions, the combination of our cash on
hand and available debt capacity provides more than enough liquidity to
fund our remaining cash requirements through the anticipated close of
the merger with EchoStar.
Let me now take just a minute to discuss the new accounting standard on
goodwill, Statement of Financial Accounting Standards No. 142 and its
impact on HUGHES. We are currently in the process of implementing the
new accounting standards, which requires that goodwill be tested for
impairment as of January 01, 2002. At this time, it appears that we
will need to perform the comprehensive appraisal of the assets and
liabilities required by FAS 142 for PanAmSat, DIRECTV Latin America and
DIRECTV Broadband.
6
Because these appraisals are not yet completed, we are not able to
estimate an amount of goodwill write-down, if any, at this time. The
total amount of goodwill recorded for each of the entities is
approximately $2.7 billion for PanAmSat, $600 million for DIRECTV Latin
America and $100 million for DIRECTV Broadband.
Now let's move on to guidance for the second quarter and full year.
Again, since the business units will individually discuss their
projections, I'll stick to the guidance to the consolidated HUGHES.
Second quarter revenue is expected to come in between $2.1 and $2.2
billion with EBITDA with $80 to $110 million. Even though we've had
several one-time items and are now reflecting the impact of the
Argentinean currency devaluation on DIRECTV Latin America, we still
expect to attain our prior year our prior full-year guidance for both
revenue and EBITDA of $9 to $9.2 billion and $750 to $850 million,
respectively. Additionally, our full-year cash requirements of $1.5 to
$1.7 billion are unchanged from our prior forecast.
As always, I invite you to look at our Earnings Release for a
comprehensive view of all of our guidance. With that, I'd now like to
turn the call over to Roxanne for comments on DIRECTV US.
Roxanne Austin: Thanks, Mike. DIRECTV's improved operating results in the first
quarter continue to validate the strategies that we put in place in the
second half of last year. This is the third consecutive quarter that we
have posted subscriber growth numbers that have exceeded expectations
and I applaud the efforts of the entire team at DIRECTV, which has
implemented so many successful tactics to make this happen.
Before looking at our results, as Jack mentioned earlier, we have a new
schedule included in the Quarterly Earnings Release that shows the key
DIRECTV US financial metrics. The numbers I'll be sharing with you in a
moment are reflected in this new schedule.
7
Demand for DIRECTV in the US remains very strong. During the first
quarter, excluding subscribers in NRTC territories, DIRECTV added
approximately 764,000 growth subscribers. The most growth adds for a
first quarter in the eight-year history of DIRECTV. After accounting
for customer churn, we added 350,000 net new subscribers.
Part of our strong demand is due to our simplified programming, our new
packages and our new retail promotions. We now have a standard 365-day
a year offer whereby a customer can have one box installed for $49 or
less and two boxes installed for $99 or less. In addition, many
retailers are taking advantage of the opportunity to increase DIRECTV
sales by discounting these price points even further on their own
nickel.
As in all DIRECTV funded offers, to enjoy these benefits customers are
required to make a 12-month service commitment. And to keep the offer
fresh from quarter to quarter, we'll layer on additional promotions
such as free or discounted programming for a limited time.
And our new programming packages, which we started offering on February
1st, also seem to be very popular. Especially popular is the new Total
Choice Plus offering which includes over 130 channels including local
channels where available. This package sells for $39.99 per month and
provides customers with a very attractive value proposition compared to
so-called "digital cable packages"; where local channels and many of
the cable networks are still in analog format.
The one common thread between the new retail offers and the consumer
promotions is simplicity. They're easier for the customer to understand
and they're easier for the retailer to sell.
Another key driver of the lift in demand is attributable to the fact
that we now offer all local channels in our 41 local channel markets.
This was made possible by the successful launch last December of
DIRECTV 4S our spot-beam satellite. All of our customers, including our
installed base in our 41 local channel markets can receive their local
channels via a single dish.
8
In the 41 markets where we provide local channels, DIRECTV has now a
superior all digital cable replacement offer for consumers. We have
seen in these 41 markets that demand, in terms of gross subscriber
additions is up over 20% over last years first quarter. Importantly, in
our largest markets such as New York, Los Angeles, Chicago, Miami and
San Francisco, we're seeing our highest growth rates in some cases over
50%.
And we're also seeing a significant increase in new customers signing
up for local channels. For example, last year we were attaining local
channel penetration rates for new customers at just over 60%. And
today, with all local channels available in 41 markets, over 70% of our
new customers are purchasing packages that include local.
While these factors are driving new customer demand, they are also
helping retain our current customer base. For the first quarter, churn
was 1.6%, which compares favorably to the 1.8% turn we experienced in
the first quarter of last year and the 1.7% for the fourth quarter of
this year. Although there's always room for improvement, we feel pretty
good about how we're faring on our battle against churn. We expect the
first quarter performance to continue in the second quarter and improve
even further in future quarters.
As a result of the continued strong demand and improved churn
management, we now believe that we're able to add approximately 1.2
million customers this year, up from our prior guidance of one to 1.2
million. This is significant because this revision includes only
DIRECTV core subscribers and excludes NRTC subscribers. Effectively,
this represents a 200,000 increase in net additions for DIRECTV core
customers vs. our prior guidance.
I know a lot of investors are asking about what our strategy is with
respect to Radio Shack and what we plan to do to make up for lost sales
due to Radio Shacks decision to go non-exclusive. As most of you know,
Radio Shack was unable to reach an agreement with the NRTC and Pegasus
to be compensated for DIRECTV sales in NRTC territories. As a result,
they made the decision to begin distributing Dish Network.
9
First, let me say that we expect to do well at Radio Shack based on our
brand, strong consumer offers and our differentiated content offerings
including expanded local channels on one dish.
More importantly, Radio Shack is only one piece of a first rate
distribution network that is highly committed to the DIRECTV service.
We are working closely with our entire distribution network, and
particularly those partners who remain focused on the DIRECTV service
to ensure that they have the tools to aggressively promote and take
advantage of the improved DIRECTV service and customer offerings.
In short, while we regret the loss of our exclusivity at Radio Shack,
we remain confident in the breadth, experience and motivation of our
overall distribution network as evidenced by the fact that we're
raising our subscriber guidance for the full year by 200,000.
One more point to address before moving off the topic of subscribers.
As you may have seen in the press release this morning, we announced
today that we are no longer counting what we had referred to as
"pending subscribers". Those subscribers who purchase equipment and
entered all the required customer information into our billing system,
but had not yet activated service. We began including pending
subscribers to part of our subscriber base in the early years of
DIRECTV, specifically the second quarter of 1995 when they amounted to
a larger percentage of DIRECTV's customers.
At that time, there was a much longer lag between the time the customer
purchased equipment and entered all the necessary information from when
they activated the service. This was due primarily to more customers
self-installing their equipment and a significantly smaller
installation network. So pending subscribers made sense because it more
accurately reflected DIRECTV's growth.
As DIRECTV has grown to over 10 million customers, pending subscribers
represent a smaller percentage of our subscriber base. In fact, over
the past couple of years, the total number of pending subscribers has
remained relatively flat. This tells us that although this policy was
meaningful several years ago; our business has evolved to the point
10
where the inclusion of pending subscribers is no longer needed to help
explain our business performance.
Moreover, since a high percentage of these pending subscribers become
active subscribers, we believe that this policy change reflects a
simplified approach to counting our subscribers consistent with the
rest of the multi-channel industry. In fact, including pending
subscribers as part of our customer base today actually distorts
DIRECTV's true operating performance who are, for example, artificially
depressing revenue per user or ARPU.
So how does this decision affect DIRECTV? Most importantly, this change
has absolutely no impact on DIRECTV's past or future revenues, EBITDA
or cash flow. The key change is that from a historical perspective, our
cumulative subscriber base has been reduced by the approximately
360,000 subscribers that have been classified as pending. And since
ARPU is calculated by dividing total revenue by DIRECTV owned and
operated subscribers, our ARPU will increase, on average by about two
dollars as a result of this change.
Churn will also increase by approximately 6/100ths of one point per
month. For example, churn in the quarter would have been 1.54% vs. our
reported 1.6%. This policy change is consistent with my goals of the
last nine months to update or change operations, procedures and
policies that no longer make sense. As you know, during this time our
team has made many operational changes that have significantly improved
our financial performance. We've also made many procedural changes to
simplify our business while also providing more clarity and
transparency. That's what we're hoping to accomplish with this change.
And one final point before moving on. A couple of weeks ago, Pegasus
reported that they had removed from their subscriber base approximately
120,000 customers who's service had been suspended for prolonged
periods of time. Since Pegasus does not share specific subscriber data
with us, we're not sure what kind of subscribers or customers they
removed. However, for consistency, we did remove these 120,000
customers from our historical subscriber base in the first quarter.
11
Now let's move on to revenues. For the first quarter, DIRECTV's revenue
of nearly $1.5 billion beat expectations. This strong performance was
due primarily to higher than expected net subscriber additions coupled
with better than expected ARPU, mainly from our higher local channel
penetration rate I talked about earlier.
ARPU was $56.70 for the quarter vs. $58.50 last year. Those ARPU
numbers are calculated on the same basis, that is, excluding the
pending subscribers from the denominator for each period. Although ARPU
in the quarter was better than our expectations, it was lower than last
year mostly due to the lower premium package revenue and fewer
pay-per-view purchases, a trend that we've seen over the last 12
months. Our new simplified program packaging strategy was put into
place in February specifically to address this trend in ARPU and the
early results of the strategy are both positive and consistent with our
expectations.
More importantly, for the year, mostly as a result of the higher net
subscriber adds and slightly better than planned ARPU, we're increasing
our revenue guidance to $6.2 billion compared to our previous guidance
of $6 to $6.2 billion. ARPU for the full year is expected to be
approximately $57 to $58 per month.
Consistent with our guidance, Subscriber Acquisition Costs - or SAC-
was $520 per gross subscriber addition during the quarter. The
improvement in the first quarter compared to the $560 level we ran
during the second half of last year was due primarily to the
elimination of the box subsidy we'd been paying to manufacturers of
DIRECTV equipment and lower non-activations as a result of our new
activation policy at retail.
Compensation to our retail partners, which comprises the largest
component of our SAC, continues to be tied to their ability to secure a
commitment from the customer to activate and retain the DIRECTV service
for a minimum of one year. This clearly appears to be having the
desired impact as approximately 90% of the new customers who are
signing up for DIRECTV are committing to the year of service. For the
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full year, we're confident that we can maintain our SAC at the prior
guidance of approximately $525.
Pre-marketing cash flow was 39% of revenue for the quarter. For this
year, we continue to believe that pre-marketing cash flow will remain
at this level or slightly higher.
One of the highlights of the quarter was an important sign that we're
doing things right at DIRECTV. That is, the $85 million of EBITDA we
attained in the quarter. While this result fell within our guidance
range of $80 to $100 million, our EBITDA performance was significantly
better than expected given our substantial over performance in
subscriber additions.
Driving the better than expected EBITDA results were a combination of
operational improvements, the most significant of which included the
margin derived from the slightly higher than planned ARPU we discussed
earlier, and lower expenses resulting from our continued focus on
managing our costs.
We expect to continue seeing EBITDA improvements during the course of
the year. As a result of the strong performance, we believe that we can
achieve the low end of our prior EBITDA guidance of approximately $525
million even though we're increasing our full-year net subscriber
guidance by 200,000.
In summary, I'm really pleased with the progress we're making this
quarter in getting the DIRECTV business back on track. And since it's
springtime and a new Yankee season is now upon us, today I see DIRECTV
as being in the early innings of a nine-inning turnaround story. While
we're doing some good work, there's so much left to accomplish. So with
that, I'm going to turn the call over to Kevin McGrath who will provide
an update on DIRECTV Latin America, Kevin?
Kevin McGrath: Thanks, Roxanne. The DIRECTV Latin America or DLA subscriber
base grew by 32,000 in the first quarter. The increase, while modest,
demonstrates our ability to continue to grow the business while dealing
13
with the economic crisis in Argentina. The Argentina devaluation
affects not only subscribers, but also revenues and EBITDA, as I will
discuss further.
The first quarter revenue was $165 million. This is unchanged from the
first quarter of 2001, because the increased revenue generated from a
larger subscriber base was primarily offset by the effects of the
devaluation in Argentina. First quarter EBITDA was a negative $61
million including a negative impact of $32 million due to the Argentina
devaluation.
As we discussed with you in January, the volatility in Argentina
presents us with great challenges. Excluding the effect of the
devaluation in Argentina, DLA has improved its EBITDA approximately 34%
compared to the first quarter of last year.
Now as you may recall, churn is cyclical and historically, DIRECTV
Latin America had by far its highest rate of churn in the first quarter
of each year. We expect the same to be so in 2002. First quarter churn
of 3.2% was slightly higher than we planned but it's a substantial
improvement over the 3.8% rate during the same period last year. This
improvement is significant considering the Argentina currency
devaluation and the political turmoil in Venezuela.
To reduce the financial impact of churning subscribers, we continue to
utilize a selective subscriber acquisition process and are still
confident that we will reach our full year average of 2.5% monthly
churn.
When I spoke to you in January, the Argentina Exchange rate was 1.7
pesos per US dollar. At that time we estimated that such an exchange
rate would result in an $80 million loss in revenue and a $50 million
decline in EBITDA from our prior forecast. Today the rate is
approximately 2.9 pesos per US dollar and most forecasters expect the
rate to increase throughout the year.
This dramatic change in the exchange rate significantly affects our
revenue and EBITDA in Argentina. We are now project a revenue loss of
approximately $135 million and an EBITDA loss of $95 million as a
result of the Argentina devaluation. These estimates are based on
projections for year-end rate of exchange of just under 5 pesos to the
14
dollar. We will continue our aggressive efforts to increase prices,
re-negotiate programming contracts, and further reduce SG&A in order to
mitigate the losses as the year progresses.
As a result, full year revenues are now forecast to be $800 to $850
million. Compared to our prior forecast of EBITDA, breakeven excluding
the devaluation, we are now forecasting a full yearEBITDA loss of
approximately $100 million. Virtually all of the decline is due to the
Argentine devaluation.
Our second quarter revenues are forecast to be $225 to $250 million
including the impact of the World Cup and the Argentine devaluation. We
are forecasting a second quarter EBITDA loss of approximately $95
million due primarily to the planned expenses relating to World Cup as
well as a $35 million devaluation impact.
World cup contracts have been signed with TV Azteca, PCTV, CNI Canal 40
and Multimedios/Minenio in Mexico and Canal 2 America, and Canal 7 in
Argentina.
While we recognize that the current economic crisis in Argentina
represents a significant challenge to our operating performance, we
will continue to monitor the economic environment in Argentina and
throughout the region and mitigate the impact where possible. With
that, I'll turn the call over to Pradman Kaul for an update on HNS,
Pradman?
Pradman Kaul: Thanks, Kevin. HNS generated first quarter 2002 revenues of $243
million down 2% from sales in the first quarter of 2001 but at the
high-end of our guidance. As expected, continued growth in the
satellite broadband segment and strong shipments of DIRECTV receiver
systems were offset by a significant decline in the carrier segment.
Sales to domestic broadband customers grew by 18% compared with prior
year, while global satellite broadband revenues increased by 8%. During
this quarter, HNS booked contracts with important new customers such as
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American Towers, where we are helping to improve communications with
its geographically dispersed sites.
In addition, we also booked orders for:
Chrysler where we will provide broadband upgrades at over 4,500
dealerships throughout North America.
With Smart, one of DaimlerChrysler's other five car brands in Europe,
where we will provide broadband services at approximately 200 European
dealerships. Union Fenosa, the third largest Power Company in Spain for
whom we will install a VSAT Network that spans Spain and Latin America.
Nl Tree through which we will provide broadband Internet access to
roughly 800 schools initially in the Netherlands. Damon's Restaurant,
where for the first time we're teaming with an application service
provider and asked to provide differentiated service to the restaurant
industry. And Best Western International, where we will provide
broadband functionality to all Best Western Hotels in the US. When
commenting on this contract award, Best Western noted the consistent,
high quality, ubiquitous service provided by DIRECWAY.
The number of consumer and small office/home office directory
subscribers expanded nearly 10% through the quarter to over 111,000.
This subscriber base has grown 79% over the past year. We conducted
limited direct mail promotions of the DIRECWAY Internet Access Service
through DIRECTV's customers during this quarter, and were encouraged by
the initial response. Moreover, we experimented with marketing programs
that spread the up-front cost to a year and again were encouraged by
the results. For these reasons, we are reiterating our earlier guidance
of servicing two to three hundred thousand DIRECWAY subscribers by year
end. At this point, though, we expect results at the low end of that
range.
HNS continued to demonstrate its strength in the Set Top Box market,
having shipped 430,000 DIRECTV units in the first quarter of 2002, a
dramatic increase compared to the 252,000 units shipped during the
first quarter of 2001. We continued to meet the needs of DIRECTV's
growing subscriber base. As a result, first quarter revenues in our set
top segment grew by 33% compared to prior year.
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Growth in the Satellite Broadband and Set Top Segments were offset by a
significant reduction in the Carrier segment. As we mentioned when
originally providing guidance for the year, comparatives for this
segment are expected to be negative throughout the year, primarily due
to substantial completion of large projects for XM Satellite Radio and
Thuraya Satellite Telecommunications Company. The business of this
segment is opportunistic and project driven and the softness in the
Telecomm Carrier Segment is impacting it in a major way.
HNS is operating EBITDA improved $11 million compared to the first
quarter of last year and this does not include a one-time charge of $6
million associated with a workforce reduction.
Looking forward to the second quarter, we expect performance that
largely resembles what we've experienced up to this point in the year.
Growth in the Satellite Broadband and Set Top Segments should continue
but be offset by negative comparisons for the carrier segment. We
expect EBITDA to improve vs. prior year but will remain negative due to
investments in the Consumer Directory and SPACEWAY businesses.
Moreover, we are reiterating our full-year guidance of $1.3 to $1.4
billion in revenues and EBITDA of negative $50 to $70 million. Speaking
of SPACEWAY, I'd like to take a minute to update you on the status of
that important program. Progress continues on numerous fronts.
Satellite construction is well underway 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. The systems unique and
broad appeal is evidenced by the fact that we've received indications
of interest from all 500 companies and are actively pursuing more than
200 of them.
Both Hewlett Packard and Sun MicroSystems with their strategic emphasis
on peer-to-peer computing and corporate networks, along with EMC and
Polycom are now members. We remain as committed as ever to SPACEWAY and
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continue to be excited about its prospects. With that, I'll turn the
call back to Jon Rubin, Jon?
Jon Rubin: Thanks Pradman. Now let's move on to questions you may have
about HUGHES' First Quarter Results. Keep in mind that we have members
of the media on this call in a "listen only" mode. I'd 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'd like to ask callers to limit your questions to only one or
two until everyone has had a chance to ask questions. At that point,
feel free to ask additional questions. Operator? We're ready for the
first question.
Operator: Thank you. Today's question and answer session will be conducted
electronically. In order to pose a question, please press the star key
followed by the digit 1 on your touch tone telephone. Once again, if
you would like to ask a question, please press the star key followed by
the digit 1. We'll go first to Karim Zia of Deutsche Bank.
Karim Zia: Thanks, for Roxanne I guess I have two questions. On the
composition of growth, the statistic you mentioned of 70% penetration
on local, is that of just - of subscribers coming into those - into the
top 41 markets that 70% are taking? Or is that of the total gross
additions?
Roxanne Austin: No, 70% of those markets, Karim, as you've said are taking
local in the 41.
Karim: And what would that percentage be as a percentage of total gross adds?
Roxanne Austin: Well, I don't know them off the top of my head. Probably 50
roughly but maybe as high as 60, so somewhere between 50 and 60.
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Karim Zia: Okay, of new subscribers that are coming from the top 41 markets?
Roxanne Austin: No, in the top 41 markets, 70% are taking local channels, okay?
Karim Zia: Okay.
Roxanne Austin: In overall, on a blended basis, all customers in that market if
you talking about historical, I mean that's if I understood your
question. You're talking about a blended customer average, existing
customers and new customers or roughly 61%.
Karim Zia: Okay, my question then was, of total gross additions?
Roxanne Austin: Of total gross additions for the whole market, I would say it's
roughly 50 to 60%.
Karim Zia: Okay, thanks. And then on the ARPU, could you distinguish when you
say the pay-per-view and premium impact. Is that on existing
subscribers or more on incremental subscribers? Or I guess could you
say what incremental subscriber ARPU is?
Roxanne Austin: It's actually both, Karim. It's on both. We saw a trend last
year that I talked about in the last quarter of last year of declining
ARPU, primarily due to penetration rates and due to pay-per-view
purchases. If you look at what we've done to turn that around, it was
the implementation of the new package simplification that we put in
place on February 1st. And that was put in place for two reasons, not
only for existing subscribers, which we believe will have a higher ARPU
out of existing subscribers, but also for new subscribers to actually
lead with our Total Choice Plus with Local for $39.99 package.
If you see most of our ads today, they're all focused on that as our
lead ad. Because we want to actually have people come into the service.
We've actually eliminated a service called Select Choice at activation.
That was our lowest priced package.
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Today the lowest priced package is Total Choice. People can no longer
activate into Select Choice. And for those customers that we've
grandfathered into Select Choice, allowed them to keep it - the
customers who had it prior to the change, we've had to implement a
price increase in that particular package.
Karim Zia: Okay, and then going forward, what would your expectation be for
ARPU? I know you mentioned the full year, but sort-of thereafter, do
you expect this to kind of shake through and then ARPU begin to
increase again over time?
Roxanne Austin: Well, again I think the $57 to $58 dollar range is fairly
significant. I don't think you will see it in the core packages and
core programming that we have where you'll see ARPU increases in the
future will come from Interactive and other types of revenues,
advertising and other things.
Karim Zia: Okay, thanks.
Roxanne Austin: Thanks.
Operator: We'll go next to Vijay Jayant from Morgan Stanley.
Vijay Jayant: A question on - can you give us an update on the Boeing
Settlement?
Michael Gaines: Sure, this is Mike Gaines. There really hasn't been a lot of
new information. We continue in the process ((inaudible)) to try to
resolve our differences but at this point I'd say from a quarter ago,
not really much has changed.
Vijay Jayant: Roxanne, does the SAC numbers that you released in your press
release exclude advanced and leased set top boxes? If you included
them, what would that number look like?
Roxanne Austin: Roughly about $15 higher.
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Vijay Jayant: Great and one final question, for Pradman. How many two-way
subscribers are there on the DIRECWAY platform right now?
Pradman Kaul: Out of the 111,000 I think roughly 70,000 are about two-way right
now.
Vijay Jayant: Great, congratulations.
Pradman Kaul: Thank you.
Operator: We'll go next to Ty Carmichael of CS First Boston.
Ty Carmichael: Hi, just wanted to work through the numbers a little bit as
it relates to your churn and your pre-marketing cash flow calculations.
If you assume the pre-market and cash flow is 39% of your top-line
revenues, you get to about $571 million which would imply then that if
you take your $85 million reported EBITDA of about $487 million of
additional costs. Is that just subscriber acquisition costs or what's
in that number in terms of your definition?
Mike Palkovic: Hi, it's Mike Palkovic. That number is comprised of SAC as we
described it at 525 plus the category we referred to as non-SAC which
is largely retention marketing. Those two numbers comprise that
balance.
Ty Carmichael: So the retention marketing, what would that be for that for
an absolute dollar amount?
Mike Palkovic: I'm sorry, which category?
Ty Carmichael: The retention marketing.
Mike Palkovic: That category ranges between $70 and $80 million a quarter.
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Ty Carmichael: Okay. And then additionally as it relates to the plan to
disconnect - or the card swap out. Just wanted you to know, more
comments on your plans to move that technology internal and stop
working with NDS if you could just explain the logic behind that?
Roxanne Austin: Well, I think, Ty, we wanted to have greater control over one
of the key elements of security on our system, which is our conditional
access.
Ty Carmichael: Okay.
Roxanne Austin: We had significant talent within the DIRECTV organization with
respect to conditional access. We think we can better control our
Conditional Access Systems by managing it ourselves. It was with a
great deal of thought that we made that decision and we're looking
forward to getting it implemented.
Ty Carmichael: Okay, and if it's successfully implemented, it would -
given the reduction in piracy, what would we - when and what could we
expect in terms of the impact on DIRECTV numbers? Could churn go down
even further from the 1.6% down to - what's the order of impact on both
churn and net subscriber additions?
Roxanne Austin: Of course, Ty, the purpose of doing this is to try to reduce
piracy ((inaudible)) to reduce piracy. I think we've made a lot of good
progress on the piracy front but we certainly see additional
opportunities to reduce piracy by controlling the conditional access
system internally.
We do believe we can continue to see improvements in churn. As I've
said before, I mean I think we're not stopping at 1.6 and this is
certainly one other element of the - of our war on churn and piracy. So
we're continuing to focus on something that can get us down in that 1.5
or lower range.
Ty Carmichael: Okay, and then last, you just said $80 million in retention
marketing. Is that per quarter, Mike?
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Roxanne Austin: That's roughly per quarter.
Ty Carmichael: Okay, thank you very much.
Roxanne Austin: Thanks, Ty.
Man: Thanks, Ty.
Operator: We'll go next to Marc Nabi of Merrill Lynch.
Marc Nabi: Hey, everyone, how are you doing?
Man: Good, Marc.
Marc Nabi: One question to start off with relates to ((inaudible)) make a
comment about the Yankees and I guess the whole Yes Network what I'll
call the "saga" between Cablevision and YES Network. Just out of
curiosity, there were comments and I guess Skyreport talking about that
you saw a 20% increase in your gross additions in the region. What
percent of your subscribers come from, say, even the Northeast - your
gross adds?
Roxanne Austin: Boy, I don't have that number off the top of my head, Marc to
be honest with you. What I will tell you is that if you just look to
the New York DMA, of course with all of the significant press that we
got out of the dispute between Cablevision and YES, you saw a rise in
awareness in the entire market. And I think for people who were not
even Yankee fans, they now have one other reason why DIRECTV is good
over perhaps a cable alternative.
It raised awareness in the entire market and I think we benefited from
that. Whether or not the individual is or is not a Yankee fan, which of
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course as many people in the region are of course Yankee fans. But even
those who weren't we think would have benefited from that. We had
tremendous press and I know you're aware in the marketplace both in the
print media, on television, in radio that we - you couldn't pay for. I
mean it was significant exposure.
Marc Nabi: And, Roxanne, would you say though - I'm just trying to - if I
said 100,000 new customers came from that region because of, you know
the satisfaction.
Roxanne Austin: You'd be way off.
Marc Nabi: Okay that's why I just wanted to make sure of the order of
magnitude.
Roxanne Austin: You'd be too high. I think again, I think we saw a raise in
awareness. We're seeing significant increases in all of our large
markets as I said in my opening remarks, Marc. And in some cases, over
50% and I think that you see that in big markets like LA and New York
and Chicago. They're all up over 50%.
Marc Nabi: Okay. Other question relates to pending. I just want to make sure
I understand something. The way I viewed pending, if you go back to
what happened in August or let's say the second - third quarter of last
year when, we'll say piracy was actually at its height, the highest
level in our view, right? What percent of those customers, those
pending customers would you say were actually becoming DIRECTV
customers vs. they were being pirated, you know they were just taking
the service?
Roxanne Austin: Well, there certainly could have been a portion of those. I
mean there would be a number of reasons, Ty, why someone never became
an active subscriber who was ultimately pending. Obviously with the
(inaudible) majority, those ultimately did. But we had a policy that we
would turn off any subscriber that was pending - all the information
was in our billing system for them to be a subscriber but they didn't
become one after 100 days for any reason. They were no longer counted
in the subscriber base. And as you saw in our press release, the data
that we included in that last page of the press release.
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Marc Nabi: Yes.
Roxanne Austin: That number's been relatively flat over the period of time, so
I mean there could have been some number of those that did not ever
connect because of piracy but again anyone was disconnected who did not
- was pending but did not become active within 100 days.
Marc Nabi: So, to clarify for me, when you say like for example at the end
of the year there were approximately 360,000 customers in the fourth
quarter, would you say about 90% of those became DIRECTV customers? I
mean is there - I wouldn't say a very high number.
Roxanne Austin: I'd say a very high number.
Marc Nabi: Okay, the other question relates to, I guess either Ty or Vijay
whoever was asking, with respect to the conditional access. What is the
expected cost? And is it going to occur at the end of '02 or is going
to be expected after August of '03? I'm just trying to figure out when
an incremental cost will occur.
Mike Palkovic: Marc, it's Mike Palkovic. We have provided in our plan
approximately $150 million for both the cost of the card and the
delivery of those cards during - in this year.
Marc Nabi: So, embedded in your $525 EBITDA estimate is $150 additional cost
that you would normally not have had related to conditional access?
Mike Palkovic: No, Marc, that number is not in our SAC, we have that.
Marc Nabi: No, not SAC - total EBITDA.
Mike Palkovic: Sorry, it's not in our EBITDA. It's included in our Capex
numbers.
25
Marc Nabi: Oh, so you're going to capitalize it?
Mike Palkovic: That's correct.
Marc Nabi: Okay, very well. Well thank you very much.
Mike Palkovic: Thank you, Marc.
Operator: And we'll go next to William Kidd of Lehman Brothers.
William Kidd: I'm not ((inaudible)) this is Roxanne for you, but could you
comment on what's going on specifically in terms of your strong growth
vs. what's going on with the NRTC broadly. And is that - is there a
sector trend? Is it NRTC trend and just why is the growth so different?
Roxanne Austin: Well, William, I don't want to comment on NRTC, obviously you
need to talk to them about their strategies. I've got one job and
that's the focus of ((inaudible)) DIRECTV US owned and operated subs
and that's what we're focused on. But I think you can see with the
inability I would only speculate that you see the inability to reach
agreement with retailers such as Radio Shack on compensation as an
example of probably one of the reasons. I mean, I think you've got to
ask them.
William Kidd: At the same time, Roxanne you alluded to the fact that in the 41
markets here you have local service that you're growth is better than
in other areas.
Roxanne Austin: Absolutely.
William Kidd: And so, I guess can you give us some characterization of what
rural America looks like today from your perspective in terms of - are
you seeing growth there? Is it bigger than this 20% differential? Is
that your worst market today? And if that's not your worst market,
what's your worst demographic?
26
Roxanne Austin: Well, I think we certainly have significant penetration in
rural America between, you know, all the satellite providers in the
marketplace. I think it's clear that growth for us will come in those
markets where we have a full cable alternative layout. And today,
that's our 41 markets going to 51 before the end of the year and, of
course, DIRECTV has the added advantage of the single dish to be able
to provide all the local channels in the 41 markets.
So, as I look at that, it's clear to me that having a full cable
replacement is what's driving our growth. And we do not see that growth
in areas where we don't have a full cable replacement. So, it's
critically important to do what we did by launching and meeting our
must-carry obligations, having a single digital alternative and then
launching the additional 51 markets.
Jack Shaw: One thing, William that is kind of interesting to me, you know we
have made the case that the merger and the combination of the spectrum
and the doing away with the duplicate channels and so forth will allow
us to go to all - and another satellite - will allow us to go to all
210 markets. And I think some of the data that DIRECTV and Roxanne has
given to you folks today, I saw for the first time yesterday. And I
think it is really pretty much proven the point that when we can put a
package together that competes with cables full package, we can go
toe-to-toe with them. When we don't, we're not nearly as robust in
competing against them.
William Kidd: Okay, and with respect to I guess Pegasus, I guess I had always
thought that this was going to be likely resolved by litigation. But
with the whole Radio Shack issue, it seems like DIRECTV is getting
collateral damage from the whole relationship with Pegasus. And it
seems to me that there's a certain number of subs that you would lose
were it no longer makes sense to continue to dispute this.
And, you know I've never been a big proponent of buy-out but you don't
have to lose that many subs for Pegasus to become plausible in terms of
resolving that through acquisition. And, I guess how is the Radio Shack
situation, in other words changed your perspective of Pegasus, if at
all? And do you still expect this will likely resolved by court some
time either later this year or early next year?
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Roxanne Austin: Well, it hasn't changed our position with respect to NRTC
Pegasus. Certainly Radio Shack, as you know was an exception, not the
rule. It certainly was a large CE retailer who has significant
penetration because of their store demographics and NRTC territory. So,
they had about 25% of their total sales were in NRTC territories.
So I would say they are an exception. We're ((inaudible)). We're
continuing to focus on our business and growing our business and that's
what we're going to continue to do for the rest of the year with
respect to the litigation, again the timing hasn't changed.
William Kidd: I appreciate it and congratulations on the strong result.
Roxanne Austin: Thank you.
Jack Shaw: Thank you very much, William.
Operator: We'll go next to John Stone of Ladenburg Thalmann.
John Stone: Congratulations on a good quarter. My first question is related
to the DIRECTV DSL offering. At what level of subscribers do you guys
project that we can get this to break-even?
Roxanne Austin: Well, it's going to take a while, with all honesty, to get to
break-even, John. I mean this is a business that today, the economics
are very tough for us. Because our subscriber acquisition costs,
looking at the access costs, what it costs us in this business, it is
difficult to see a break-even point in the next couple of years in that
business, quite frankly. And it's something that we're focused on very
heavily because it's costing us a lot of money today and we do not see
the kind of critical mass yet that we need to be able to see
break-even.
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John Stone: I really - I'm not interested in so much as when it might
happen, but in just what it would take in terms of subs. Can you give
me any kind of a ballpark for that?
Roxanne Austin: Well I think the honest answer is, it depends on what happens
in the regulatory environment and whether or not the access costs
continue to be as high as they are today. If they're as high as they
are today, I mean you've got to have numbers that are, you know, well
north of a million subscribers to get there.
John Stone: Okay, what sort of overlap to you guys see between the DIRECTV
Broadband and the DIRECTV Video customer bases?
Roxanne Austin: We're seeing roughly about 30% or so are also DIRECTV customers
today in the DIRECTV DSL offerings.
Jack Shaw: In the DIRECTV - excuse me in the Broadband offering, satellite
based Broadband offering I think Pradman is at 50% of your two-way
customers are also DIRECTV customers.
Pradman Kaul: Right, I mean both two-way and one-way. A lot of the one-way guys
initially (inaudible) DIRECTV customers.
Jack Shaw: So there's quite a high correlation.
John Stone: Okay, great and then of course that's getting to really what you
were saying just a few moments ago, Jack. You were saying that to be
competitive with cable, you really have to be able to have a full
package that goes up against them.
Of course, the ultimate cable package is voice, video and data and
through DIRECTV DSL and you recently mentioned that you were going to
be putting voice over IP equipment into the DSL gateways, and with your
existing satellite video offering it would seem that, at least from a
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customer perspective, if you can get it all to work and the economics
to work, that you might have a full package as well in that sense.
To what extent - when do you think this is going to, you know looking
out a little ways, what do you think it's going to take to get to the
point that you can have a full package to go up against cable and
perhaps start to narrow the gap between what cable customers are valued
for, you know north of 4,000 - sometimes north of 5,000 and where your
customers are well, south of 2,000 each?
Jack Shaw: I don't know that I can answer those questions. Concerning voice
and the offering of voice by HUGHES in whatever framework, I think
we're a ways away from doing that. But concerning our valuation,
concerning cable, I mean obviously we always thought that we have been
valued not quite properly relative to cable. And as we get closer to
their offering and take more and more customers away from them, maybe
people will see that our valuation should be closer to theirs. But
that's kind of speculation on our part.
John Stone: Thank you very much and again, congratulations on the quarter.
Jack Shaw: Thank you.
Roxanne Austin: Thank you.
Operator: We'll go next to Ray Schleinkofer of Thomas Weisel Partners.
Ray Schleinkofer: Yes, congratulations on a nice quarter. Just a quick
question, with churn coming down. A lot of that probably relates to
subscribers coming in who are part of a twelve month commitment that
you - that program that you put in place sometime last year. I was just
wondering, do you have any statistics on what percentage of your
subscriber base has now sort of migrated into one of those programs
that can keep subscribers in place?
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Roxanne Austin: Well, we started the annual commitment requirement in October
of 2001. So we had roughly a couple of months - actually about, yes a
couple of months in 2001 and then the full quarter this year. So a
significant portion of the growth adds in Q4 and then virtually all of
the growth adds in Q1 came in under the Annual Commitment Offer.
So while you're seeing the impact of it, you certainly haven't seen the
full impact of it yet because you won't see the full impact until, of
course, it's been implemented for a full 12 month period.
Ray Schleinkofer: Okay, that's great and then just sort of on a bigger
picture question. It seems like the majority of your subs - your sub
adds are coming in from the major markets and those are areas where
presumably digital cable has already been rolled out. Are you seeing -
is it tougher to get in to some of those places with digital cable?
Does digital cable make any type of a difference as you look across the
board trying to pick up subscribers? Or does it really not matter?
Roxanne Austin: Well, obviously digital cable is the competition, right?
Ray Schleinkofer: Right.
Roxanne Austin: So the way we've promoted and packaged our product has been
directly aimed at the cable competition. If you look at our Total
Choice Plus with Local Channels, the package that we lead with, and all
of our advertising and marketing, the $39.99 package. At 130 channels
with all the local channels plus all the additional offerings that we
have in all digital formats, that is a killer package against any
digital competitor in terms of the digital market.
We think we have - continue to have, you know better quality, better
value. Many of those channels that they carry if you buy the digital
tier you're still getting a significant number of channels in the
analog format. They just can't compare to an all digital - fully cable
competitive with all digital channels example.
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So, again, it's why Jack said earlier that it's so important that we
have local channels to be able to compete. And when we compete with all
of our guns, we're darn good competitors.
Ray Schleinkofer:That's great, thanks guys.
Roxanne Austin: Thanks.
Jack Shaw: Thank you.
Operator: We'll go next to Armand Musey of Salomon Smith Barney.
Armand Musey: Good afternoon, guys and congratulations on a pretty solid
quarter.
Roxanne Austin: Thanks, Armand.
Armand Musey: A couple of questions. First of all, obviously you're taking up
guidance a little bit on the subscriber numbers and you're also
indicating that loss is going to be a little higher in GLA, but you're
EBITDA number's going to be the same. Give us a little bit of an idea
where those - where you're wringing out the cost savings there.
Mike Gaines: I think what you're seeing Armand is that taking our EBITDA
guidance at DIRECTV Latin America you know, to a loss of $100 million.
I think all of our businesses have held solid and I think that allows
us to stay within the range, the top level for the company. I don't
know if that answered your question or not.
Armand Musey: Well, it seems that if you're adding more subscribers, you're
obviously should have little higher subscriber acquisition costs and at
the same time you have, you know a little ((inaudible)) losses in GLA
but your consolidate EBITDA is still coming in kind of where your
guidance was.
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Roxanne Austin: We actually have improved, if you're talking about DIRECTV US
((inaudible)) and then I'll let Mike comment on the HUGHES level, but
the DIRECTV US only, we continued our focus on cost-cutting. So as I
said in my opening remarks, the additional subscribers that we're
bringing on, the added margin from them and our cost-cutting are
allowing us to offset the additional costs that we're incurring for
those additional subscribers.
So the combination of those, you know the improved revenue and margin
coming from the additional subs, plus our additional cost-cutting
efforts have more than offset the costs that we're seeing for
subscriber acquisitions so that extra 200,000 ((inaudible)).
Armand Musey: Yeah, as you said ((inaudible)) put a little more color into
when you say "cost cutting". Exactly where is that coming from?
Roxanne Austin: It's really out of our G&A.
Armand Musey: Okay.
Roxanne Austin: That's where we've cut it.
Jack Shaw: We, as you know Armand. This is Jack. As you know, probably nine,
ten months ago we really started a concerted effort to kind of
restructure our costs at all of the HUGHES companies. And you know it
really wasn't just talk on our part, we really felt we had to have it.
So we did some real stuff. And it's starting to come through and you
know that's a positive.
But I think the biggest positive to me is that I think we have only
just begun. I think there's more to come.
Armand Musey: Okay, any color on sort of what that real stuff is? Are you
handling calls more efficiently? Is it lower salaries? Is it just lower
head count?
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Mike Gaines: Armand, Hi. It's Mike. Yeah most of the ((inaudible)).
Armand Musey: Is there one item that really sticks out where you've gotten it
or is it a lot of little things?
Mike Palkovic: Well, a lot of it came with a reduction in force last year.
That floats through this year and we're getting the savings from that.
And it's also across the board not growing our costs year-to-year but
rather holding a flat year-to-year which has a significant value in
terms of driving more of the, you know, volume related margin to the
bottom line.
On the customer sat side, we're actually making some investments in
that area to make sure that we provide the kind of service that can
support, you know the churn reductions that we've had. That's an area
we're actually spending a little money in.
Armand Musey: Okay, final question - it relates to direct sales. Can you talk
about any efforts, or the development of the direct sales efforts? You
know, obviously EchoStar is putting a fair amount of emphasis there and
Pegasus has put in enormous emphasis there. Talk a little bit about
what kind of progress you've made there or how you see that - your
strategy in that area?
Roxanne Austin: Yeah, as we've said earlier, you know we see roughly about you
know roughly about 10% or just under of our total growth adds this year
will come from direct sales. We continue to see that be the case. We
can see - we can drive additional customers using the direct sales
channel and we'll continue to do that.
Armand Musey: How much difference is the SAC when direct - between direct and
going through dealers - ballpark?
Jack Shaw: Armand, if you keep the direct sales at the level of
((inaudible)), it's a very efficient cost per sale, because it drafts
heavily off of our, you know, mass market advertising. To drive it
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significantly beyond that, you start driving the SAC up. So we're being
a little bit careful not pushing it too hard and causing a higher SAC
than our major market.
Roxanne Austin: We actually tried to look at the sweet spot, Armand where you
can draft, as Mike said, off of the tagging that you're doing on
national ads and not go out with, for example, mass mailings, a lot of
targeted telemarketing types of activity. Because when you then - your
hit rate on direct sales, you have to spend many many more dollars
before you actually have a hit on a customer.
As opposed to the customer through our tagging, roughly 10% just
calling up and wanting service. That's a very efficient sale for us.
When we start going beyond that, it becomes even more expensive than
our retail channels, the way we've realigned our incentives.
Armand Musey: Okay, thank you very much and congratulations again.
Roxanne Austin: Thank you.
Jack Shaw: Thank you.
Operator: We'll go next to Bob Peck of Bear Stearns. Mr. Peck, your line is
open. Please check your mute button.
Hearing no response, we'll go to Mr. - we'll go to Robert Chapman of
Chapman Capital.
Robert Chapman: ((inaudible)). Hello?
Operator: Mr. Chapman, you're line is open.
Robert Chapman: I'm sorry about that, my question was asked, thank you.
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Operator: We'll go next to Blaine Marder of Iridian Asset Management.
Blaine Marder: Two quick questions. If I add up the EBITDA losses of your
businesses that are currently in the negative, and the Cap ex against
those businesses, there's roughly, call it a billion dollars flowing
out of the company this year. Can you just update us on progress to
either kind of reduce those losses or pare back those businesses and
reduce that billion dollars that's going out of the company? Thanks.
Mike Gaines: Well, I think you've got to put it into the individual buckets.
On SPACEWAY, I mean, as we've talked about we are not attempting to
pare that back in terms of stopping the program. We very much believe
in the Spaceway platform, riding on the strength of our enterprise
business. We're doing everything we can to limit the cash outflows but
we are committed to going ahead.
I think with respect to our broadband offerings, being DIRECWAY at
Hughes Network Systems as well as DIRECTV DSL, we are committed to
funding them this year, but I think in the context of, if there was no
merger and we had to do it alone, we would evaluate where we stood and
consider really, seriously if we would keep spending that money.
So I think for now we are trying to limit the cash outflow in those
businesses, but assuming there's a merger, I think that is a decision
for the combined company and in the absent of one, we would seriously,
you know reconsider those expenditures.
Blaine Marder: Okay, and next can you give me a sense of when the core
DIRECTV US business will be self-funding? It looks like that's a
possibility next year? Is that the case?
Roxanne Austin: It's actually Q4 of this year.
Blaine Marder: Q4 on a run rate basis?
Roxanne Austin: Yes.
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Blaine Marder: Thanks a lot.
Roxanne Austin: Thank you.
Man: Thank you.
Operator: And we'll go next to Jeff Macke of Buckshot Capital.
Jeff Macke: Yeah, Hi guys. I have some questions. One just about your churn
rate which I notice is reduced and how that dovetails with the rollout
of PVR's both Ultimate and TiVo. The other question is pertaining to
the Series II TiVo PVR unit that's rolling out some time in the fall.
If you'd add any color for us in terms of numbers that you're looking
for from that and just your general plans in terms of marketing.
Roxanne Austin: I would say, today the PVR functionality of TiVo and Ultimate
hasn't added significantly to the reduction or churn rate. The numbers
just aren't high enough in terms of penetration of those products to be
able to have an impact today.
Jeff Macke: Do you have any numbers in terms of how the products, to the
extent that they are penetrated are doing themselves?
Roxanne Austin: Because they are public companies we don't comment individually
on what happens in their particular - but I can tell you it does not
have a significant impact on reduction of churn. As it relates - you
know we're excited about the new TiVo functionality coming out with the
next generation in the fall.
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As you know, we've made an announcement that we are going to focus on
the TiVo technology for DIRECTV in the US. And we're excited about that
and our relationship will continue to evolve where we are ultimately in
much greater control of our product offering in the US.
Jeff Macke: So are you going to refrain from any numbers or anything on
those plans?
Roxanne Austin: Yes, I am, thank you.
Jeff Macke: Okay, no problem, thanks.
Jack Shaw: Thank you, Jeff.
Operator: And we have a follow up from Mark Nabi of Merrill Lynch.
Marc Nabi: Just one thing regarding the conditional access again. I'm just
trying to see how, Roxanne, it coordinates with - if in fact the deal
does occur, which you anticipate in the fourth quarter. How big of an
issue is that going to be with respect to, you know, you're now about
to go into this whole process of giving everyone new cards and spend
about $150 million to do that. Have you guys discussed that with
EchoStar at all?
Eddy Hartenstein: Marc, this is Eddy. We certainly have. Both satellite
platform providers are on independent paths to upgrade there - are
constantly look at upgrading their Conditional Access Systems.
We have selected a way and as we've indicated with our SEC filings and
data that we've given them that we would go to a dual-speak type of
platform where both the EchoStar and the DIRECTV Conditional Access
Systems are capable of speaking to boxes as we go forward.
So, the - remember the transition to get everyone on a unified platform
is on the order of three years. Starting from the close of the merger
and you're going to - as you propagate new customers coming on
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post-close you would have a new system capable of going either way and
you would have probably need all of the three years to make the
complete transition, which is about, I think the expected life cycle of
a next generation Conditional Access System.
One thing that we have come to in common, and this has come about from
the transition meetings is that there's two things that you want to
have and control your own destiny on and one of them is the Conditional
Access System, the second is the billing system, and that's one of the
things that this merger will allow us to do in additional to doing all
the good beneficial things of all the local markets and all the
channels in all two hundred and ten DMAs.
Marc Nabi: Great, thanks a lot Eddy.
Eddy Hartenstein: Thanks, Marc.
Operator: And we'll go next to Vijay Jayant of Morgan Stanley.
Vijay Jayant: Yeah, two quick follow up questions. One on the YES Network.
EchoStar and Cablevision are not carrying them. Can you sort of tell us
why DIRECTV is carrying it in relation to the economics of that deal?
Roxanne Austin: We were the first distributor to sign up for the Yes Network.
We got some - that was very favorable in terms of our ability to sign a
deal. We don't comment specifically on the economics of a particular
deal. But we think we were able to enjoy some favorable terms by being
the first. And we certainly have enjoyed greater than we expected
exposure for doing so.
So, we looked at it, quite frankly, Vijay, on an analysis to say - how
many subs would have to turn in our New York DMA to make this worth it
for us? And, you know it doesn't have to be a very large number to make
it - allow you to be able to carry the service.
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Vijay Jayant: Great. On the financing and the cash burn, given the losses of
the startup initiative. From what I understand on the merger agreement,
that EchoStar has an obligation to, in effect buy PanAmSat within nine
months after this closure - or after the - if the HUGHES merger is not
permitted and it's not appealable at some point within nine months.
Given the cash needs into '03 and given the cash that you have on your
balance sheet right now and the cash burn that you see in these, you
know ((inaudible)) and Spaceway and so forth. Can you walk us through
what sources and uses of cash would be in the next year? Given also,
you know the Boeing settlement at some time?
Mike Gaines: Sure. First let me comment. I think your comments about the
timeframe for PanAmSat are a little bit longer. I believe that
immediately upon a failure of regulatory approval, the process for them
to buy - EchoStar to buy PanAmSat would commence. It would only depend
upon regulatory approval of that deal which would not be expected to be
nearly as length that you just described.
In terms of our overall cash flow situation, our guidance for this year
of approximately $1.6 billion in cash requirements. I think you saw
from our release that we've put in place liquidity that's substantially
above that. I think it's at least $500 million more than is required to
get up through this year.
And I would observe that, we really expect to be free cash flow - or
break-even, basically, next year. So I think the financing hurdle would
not be large at all. We would have maturity of our existing facilities
at the end of this year, which we would attempt to roll over. Or, I
think in an alternative we would go out and raise new debt this year to
provide some of that future funding which we think is very doable.
Vijay Jayant: All right, thank you.
Mike Gaines: Thank you, Vijay.
Operator: We'll go next to Ty Carmichael at CS First Boston.
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Ty Carmichael: I just wanted to follow up with regard to your lease plan
and just ((inaudible)) provide some transparency to how the success of
that and of that 10% direct sales ((inaudible)) total stems from the
lease plan? And then how you see that playing out in the competitive
landscape, you know, in Radio Shack say, for example where Echostar
will have the lease plan and you'll have the purchase offer.
You know, have you had any anecdotal evidence as to where the consumer
activity gravitates when presented with both options?
Mike Palkovic: Hi, Ty. It's Mike. First of all, we're getting about 10% of
the direct sales business is opting for the lease model. So it's a very
small percentage. And our feeling is that right now with our offer in
the marketplace being as competitive as it is both for a single room
and a two-room solution. The two-room for example, where for $99 you
can get two rooms, you know, installed for free.
It's very competitive so, consumers are not choosing the lease option
when we offer it to them. So that's kind of where we see it. So there's
no reason right now for us to, you know jump heavily into that model
based on the success we're having with our, kind of, our core offer.
Ty Carmichael: Okay, so of the direct sales, it's 100% stems from the
lease plan?
Mike Palkovic: No, I'm sorry. It's 10% of the 10%. It's only about one
percent of our gross. It's a very small number.
Ty Carmichael: Okay, all right. Thank you very much.
Jack Shaw: Thanks, Ty.
Operator: We'll go next to John Stone of Ladenburg Thalmann.
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John Stone: Hi, just a quick follow up - this would be for Kevin. In terms
of the programming for DIRECTV Latin America, presumably some fraction
of it is priced in local currencies and some fractions are programming
as priced in dollars. Can you give me some insight in terms of what
fraction of the programming for DIRECTV Latin America is priced in
dollars?
Kevin McGrath: John, I would love to tell you the substantial portion is
priced in local currency, but the majority I would say. I don't have a
specific number but it's probably in the neighborhood of 80%. It's
priced in US dollars. It's principally driven by US studios, and that's
the only way they sell in this market to everyone. They sell to cable
programmers, to Sky, (inaudible).
And what you end up doing over the course of time is having, if you
will, periodic renegotiation crisis as currency devalues, all of the
program distributors come in and sit down with all the program
providers and hassle through rate reductions. In fact, that's exactly
what we're doing right now in Argentina.
It is - it would make life a whole lot easier on all of us if they were
priced on local currency, but the studios have yet to accept that.
Everyone is in the same boat, frankly.
John Stone: Thanks, Kevin.
Kevin McGrath: Thank you, John.
Operator: Once again, if you have a question please press the star key followed
by the digit 1. We'll go next to William Kidd of Lehman Brothers.
William Kidd: Just a quick follow up on DIRECTV Latin America. What is the
service pricing strategy? Are you going to try and keep rates with
inflation? Or just how are you going to try to maintain the pricing
part of the service?
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Kevin McGrath: Absolutely, William. We're pushing price very aggressively.
And in most of the markets, we're the price leader. And we're the price
leader because we have a better offering but also because we believe
you just have to keep pushing prices in these markets to make the
markets make sense over the course of time.
William Kidd: Can you, have you raised rates already in Argentina? And if so,
can you describe by how much?
Man: We did. We raised prices- the industry raised prices on average 8% to
10%. In the month of April, we raised prices approximately 14% in the
month of April. I would expect we'll have additional price increases in
the month of May, as you can expect with the devaluation, inflation has
taken off a little bit and we're going to keep up with or exceed the
inflation rate to cover the losses here.
William Kidd: I see, okay. And from a general modeling point of view, would you
say it's fair to just keep it in line with local inflation or is that
aggressive?
Kevin McGrath: No, actually we absolutely have to keep it in line with local
inflation or exceed it. And I would tell you, for example, we would
price this also in Venezuela as the exchange moved there. And again, we
were priced at there, in excess of 15%.
William Kidd: And with respect to the card swap out, is there a expected, is
there a churn impact that anyone's anticipating and besides the cost,
do you - is there going to be an uptake in your call centers or do you
have any quantification of some of the potential ramifications?
Roxanne Austin: Based on our experience, we'd say that churn - we don't expect
to see any effects significantly on churn. You will typically see and
we've planned for some increases in call volume during the card change
period. And this is the what - this is the second major? We've done it
before, yes.
William Kidd: Great, thank you so much.
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Roxanne Austin: Thank you.
Jack Shaw: Thank you, William.
Operator: At this time, there are no other questions in the queue. Mr. Rubin,
I'll turn the conference back to you for any additional remarks.
Jon Rubin: I'd just like to thank everyone for joining us today. If you
have any further questions, please contact me or our Investor Relations
department at either HUGHES or PanAmSat. Thank you for your attention.
Have a great afternoon.
Operator: That concludes today's conference call. We thank you for your
participation. You may disconnect at this time.
END
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