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 October 16, 2002. Certain text contained within the transcript
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
OCTOBER 14, 2002
1:00 PM CT
Operator: Good day, everyone. And welcome to today's Hughes Electronics
Corporation 2002 Third 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, sir.
Jon Rubin: Thank you, operator. And thank you, everyone, for joining us for
our third quarter 2002 earnings conference call. With me today on the
call are Jack Shaw, our President and CEO; Eddy Hartenstein, Chairman
and COO of DIRECTV; Roxanne Austin, President and COO of DIRECTV U.S.;
Mike Gaines, our CFO; Kevin McGrath, Chairman of DIRECTV Latin America;
Pradman Kaul, Chairman and CEO of Hughes Network Systems; and the CFO's
from 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. I think it's evident from the results released
this morning that the third quarter gave us a great deal to be proud
of. And at the same time, the numbers clearly point to aspects of our
businesses where there is still a lot of unfinished work.
In reviewing the highlights of the quarter, I am pleased that we
achieved our original guidance for Hughes consolidated revenues, while
exceeding our expectations for EBITDA. Given the difficult global
economic conditions that in one way or another impact each one of our
businesses, this alone is quite an accomplishment.
However, I got the most satisfaction from seeing the steady and
measurable progress that our DIRECTV U.S. business is making. I was
disappointed that we fell a bit short of our subscriber guidance.
However, when I look at the reasons behind the shortfall and look at
DIRECTV's overall financial performance, I'm quite encouraged by what's
been accomplished over the past year.
Specifically, we have implemented many changes to our business that
were designed to shift our focus to maximizing subscriber returns and
cash flow. A few years ago, it made a lot more sense to focus on
subscriber growth essentially - especially considering that we were in
a more favorable competitive environment. There was greater access to
capital. And Wall Street had a strong bias towards growth companies.
Clearly, the world looks a lot different now. And the results at
DIRECTV offer the best evidence that our strategy is working. We far
surpassed our EBITDA expectations for the quarter. And we once again -
and we're once again increasing DIRECTV's full-year estimates for both
revenue and EBITDA.
These accomplishments are the result of across-the-board improvements.
For example, at the top line, we continued to see strength in our
average monthly subscriber revenue or ARPU. And at the bottom line, we
continued to reap the benefits from our rigorous and ongoing cost
reductions. Roxanne will explain these in much greater detail in a
moment.
Moving on to PanAmSat, they also had an excellent quarter, as the
benefits from a much more streamlined cost structure continued to be
realized. PanAmSat achieved its guidance for all key financial metrics,
highlighted by a 700 basis point increase in its EBITDA margin to 73%.
Hopefully many of you were able to listen to PanAmSat's earnings call
last Friday.
Hughes Network Systems also had a pretty good quarter. In addition to
meeting its revenue and EBITDA targets for the quarter, HNS shipped
approximately 737,000 DIRECTV set-top boxes, which was nearly 50% more
than last year.
Despite these accomplishments, we certainly had our share of challenges
during the quarter. In Latin America, we're battling through what is
arguably the worst region-wide political and economic crisis in recent
memory. And I think it's fair to say that even the most pessimistic
planning scenarios didn't comprehend the magnitude of the economic
meltdown that we've experienced so far this year.
As you'll hear from Kevin McGrath, we're doing everything possible to
stem the losses at DIRECTV Latin America. For the time being, we're
going to take a no-growth or limited growth strategy in the region.
We're going to hunker down, conserve cash, and weather the storm until
the macroeconomic environment turns around.
And at HNS, due to the unfavorable global economic conditions I
referred to earlier, they are lowering their full-year estimates for
revenue and EBITDA, as well as their estimates for DIRECWAY subscriber
additions.
I'd also like to mention that we are fully aware of the sense of
urgency regarding the future direction of our DIRECTV Latin America and
consumer broadband businesses. As I'm sure you can appreciate, the
direction of these businesses is partially dependent on the final
disposition of our merger with EchoStar. I can assure you that we will
be prepared to communicate these strategies with you as soon as
practically possible.
Speaking of the merger, I'd like to give you a brief update on where we
stand with respect to the transaction with EchoStar. As you know, on
October 10, the FCC refused to give its consent to transfer the
licenses necessary to allow the merger to close, finding that the
merger as structured is not in the public interest. The application has
been designated for hearing by an administrative law judge. We expect
that the FCC's orders specifying its concerns will be released later
this week.
The FCC, however, has given the party 30 days from the release of the
order to file an amended application to address the FCC's competitive
concerns and to file a petition to delay the hearing. We are actively
pursuing remedies to address both the FCC's concerns and concerns
expressed by the Department of Justice. We will file with both agencies
within the specified timelines established by each. And we will
continue to work aggressively to achieve approval of the merger.
As much as we'd like to be able to answer all of your questions about
the merger, I'm sure that you can appreciate that we're not in a
position at this time to go into any more detail. Thus, we would
appreciate if you would keep your questions focused on the quarterly
results and not on the merger.
So in summary, I believe the key takeaway from the quarter is that
we're demonstrating the discipline required to ensure that we achieve
our key goals for DIRECTV U.S., namely, to
increase the return on every subscriber we attain and to capitalize on
DIRECTV's significant operating leverage to generate accelerating cash
flow growth. The third quarter results show that we're right on track.
That concludes my opening remarks. Now I'd like to turn the call over
to Mike Gaines. Mike.
Mike Gaines: Thanks, Jack. Before our business unit leaders provide a
detailed discussion of their quarterly results, I'd like to first give
a quick overview of Hughes' balance sheet and funding position. For the
year, we now expect our total cash requirements to be approximately 700
million.
This significant improvement from our prior guidance range of 1.2 to
1.4 billion is due primarily to our ongoing efforts across all our
business units to reduce expenses and conserve cash, coupled with the
decision to monetize our remaining shares of Thomson Multimedia and
SkyPerfecTV!. We completed the sale of our Thomson stock in the third
quarter, resulting in net proceeds of $211 million.
In addition, we actually sold our stake in SkyPerfecTV! After the third
quarter ended, giving us $105 million of proceeds, which will show up
in fourth quarter cash flow.
At the end of the third quarter, our consolidated cash balance was 863
million, up slightly from the second quarter. Our consolidated debt
balance was about 3.4 billion or about $100 million less than the debt
balance at the end of last quarter. The improvement in our net debt
position during the quarter was due mainly to the sale of the Thomson
stock and better than expected cash flow performance at our business
units.
Excluding PanAmSat, Hughes level debt at the end of the third quarter
to $765 million outstanding under credit facilities totaling 2.5
billion. Funding requirements during the fourth quarter are expected to
increase the Hughes level debt balance to roughly 1 billion at
year-end.
The existing credit facilities mature on December 5. And over the last
couple of months, we've been working with our banks to refinance these
facilities. We are well down the path on this refinancing and certainly
expect to have new financing in place prior to December 5.
We expect to maintain credit availability in an amount somewhere in the
neighborhood of $2 billion or more. And if the merger were not to
occur, proceeds from the sale of PanAmSat or the break-up fee would be
used to retire this debt.
Moving on to Hughes' revenue and EBITDA guidance, we have updated our
outlook by business unit for the fourth quarter and have revised our
full-year guidance for Hughes. We now expect full-year revenue for
Hughes of 8.9 to 9 billion, compared to our prior range of 9 to 9.2
billion. In addition, EBITDA for the full year is now targeted to be
approximately 750 million or at the lower end of our prior range of 750
to 850 million.
Although we are increasing full-year guidance at DIRECTV U.S. due to
continued strong performance, this improvement was not enough to offset
the negative effect of the Latin American economy at DLA and the
slumping telecom industry impacting HNS.
With that, I'll turn it over to Roxanne Austin for an update on DIRECTV
U.S.
Roxanne Austin: Thanks, Mike - appreciate that. In a quarter that presented
some challenges, including a tough economic environment, DIRECTV U.S.
made good progress toward our top goals of maximizing cash flow and
increasing the return on every subscriber that we attained.
Our strategy for accomplishing these goals is to continue shrinking our
cost structure and optimize monthly subscriber revenue, with a
particular emphasis on improving our margins. And because these key
metrics continue to trend in the right direction, we're pleased once
again to be increasing our full-year expectations for both revenue and
EBITDA, true indications of the health of the DIRECTV business here in
the United States.
Let's first take a look at revenue. DIRECTV's third quarter revenue of
slightly more than 1.6 billion exceeded expectations and grew nearly
19% over last year's revenue. This strong performance was mostly due to
our continued strength we're seeing in average revenue per user, or
ARPU, related to the continuing improvements and penetration rates of
local channel packages, more mirroring fees generated from the larger
percentage of customers we have now taking multiple set-top boxes, and
our new programming packages, including the elimination of our lowest
price Select Choice programming package for new customers.
As a result, ARPU was $59.20 for the quarter, nearly $2 better than
last year. In the fourth quarter, due primarily to the full quarter of
revenue from NFL SUNDAY TICKET, we expect ARPU to exceed $62.
For the full year, we are increasing our revenue and ARPU estimates. We
now expect revenues to be about 6.38 billion for 2002, compared to our
previous guidance of 6.3 billion. And we're increasing full-year ARPU
guidance to $59 per month, from our prior guidance of about $58.
With EBITDA of 196 million in the quarter, we're seeing a tremendous
acceleration in this metric. EBITDA is 176 million greater than last
year's third quarter result of 20 million, excluding the severance
charge, and compares very favorably with our original guidance of
approximately 150 million for the quarter.
This overachievement was due primarily to the improvements in ARPU that
I just mentioned and the associated margins, our ongoing success in
reducing DIRECTV's cost structure, and to a lesser extent, the lower
marketing expenses associated with the lower subscriber additionS.
These improvements also drove our pre-marketing cash flow to nearly 41%
for the quarter, or almost one percentage point better than third
quarter of last year. As a result of these positive trends, we're
increasing our EBITDA guidance for the full year to approximately 580
million from our prior range of 525 to 545 million.
Our subscriber acquisition costs, or SAC, for basic and advanced boxes,
came in at $535 per gross subscriber addition in the third quarter,
bringing our year-to-date SAC average to about $530. We now expect SAC
to average approximately $535 for the full year for basic and advanced
boxes. This estimate reflects an increase to the fourth quarter,
compared to the third quarter, of approximately 20 to $25, due to the
cost of the NFL acquisition offer and a continued increase in the
number of two and three-box sales.
As evidenced in the past couple of quarters, we continue to see more
and more new DIRECTV customers buy multiple set-top boxes for their
homes, direct evidence of our strategy and success at positioning
DIRECTV as a whole-house cable replacement.
As we said in the past, although SAC is higher for these customers, the
expected return is greater, because they typically generate an
incremental $15 of ARPU, and have lower churn rates than customers with
only one receiver.
Retention marketing costs or expenses associated with marketing efforts
to our existing customer base were 84 million in the third quarter.
These expenses continue to be driven primarily by dealer commissions
and the costs borne by DIRECTV associated with existing customers
purchasing additional boxes for their homes. We expect retention
marketing costs to be in the range of approximately 90 to 100 million
in the fourth quarter.
Moving on to our subscriber performance, as Jack indicated, the 206,000
net new customers we added during the quarter fell short of our
original projections of 250 to 300,000. The primary reason for the
shortfall in net additions was due to higher than expected monthly
churn, which totaled about 1.7% in the quarter.
As we mentioned in our press release a few weeks ago, we believe the
higher churn rate was primarily related to our efforts to fight signal
piracy by replacing some of our customers' older generation conditional
access cards.
Roughly 50,000 suspected pirates churned out, once we started running
on-screen displays, interrupting their normal service, and shutting
down pay channels. This activity accounted for almost 2/10 of 1% of
monthly churn during the quarter. This means that churn would have been
in our target levels of between 1.5 and 1.6%, had we not taken these
proactive steps to combat signal theft.
In addition to the higher churn, gross customer additions of 682,000
during the quarter were modestly below our estimates. This shortfall is
consistent with the sluggish sales announced by many of our key
national retailers during the third quarter, most of which attributed
their results to a soft economy and wavering consumer confidence.
We also encountered a delay in implementing the certificate program at
Wal-Mart, which resulted in DIRECTV not being available at most of
their stores during the third quarter. We have completed a full IT
systems integration with the Wal-Mart point of sale system. And
certificates are now available in all stores, with new merchandising to
be completed by the end of October.
Looking ahead to the fourth quarter, we anticipate adding 250 to
300,000 net new customers, which translates into full-year net
subscriber guidance of 1 to 1.05 million versus our prior expectations
of approximately 1.2 million. We believe that the net subscriber
additions in the fourth quarter will be significantly higher than the
third quarter, because we expect to be able to get churn to the 1.6
level or lower. And although we don't expect the economic situation to
improve much in the near term, we are counting on the historically
strong popularity of DIRECTV during the holiday shopping season. We
will be aggressively promoting our value proposition versus cable and
focusing on our J.D. Power Customer Satisfaction Award, with targeted
radio, newspaper and television in our highest growth markets. We
expect our overall message to be supported with aggressive two and
three-room offers during the fourth quarter from our distribution
partners.
Before turning it over to Kevin McGrath, I'd like to conclude with a
few important points on how we're managing this business. We are
focused on profitable subscriber growth and increasing our cash flow.
For example, we will have positive operating cash flow for the second
half of 2002. And in addition to posting our second consecutive quarter
of positive operating profits, further indications that the actions we
are taking are starting to pay off.
These achievements reflect our conscious decision to shift our focus
away from just maximizing subscriber growth to maximizing our overall
financial performance. For example, we improved subscriber returns by
eliminating our lowest-price programming package. We attacked
first-year churn by requiring annual commitments. We stopped
subsidizing SAC for NRTC subscribers. And as a result, while we lost
exclusivity at Radio Shack, across our distribution, this decision
saved DIRECTV $100 million in 2002.
We realigned our incentives to our retail partners to focus them on our
goal of acquiring quality, committed customers. We undertook efforts to
improve our activation rate and economics at Wal-Mart by changing to a
certificate program. And we aggressively battled piracy by working
with federal law enforcement, continuing our end user program
aggressively, working on electronic countermeasures, and issuing new
access cards.
These changes are reflective of our strategy to continue to strive
toward attaining the highest quality subscriber, which we are convinced
will lead to higher returns and further improvement in our financial
performance. The results posted here in the third quarter, along with
our new full-year guidance, provides the best proof that that strategy
is working.
With that, I'll turn it over to Kevin McGrath, who'll provide you with
an update on DIRECTV Latin America. Kevin.
Kevin McGrath: Thanks, Roxanne. I'd like to start today with a general
overview of the challenging conditions we're facing in Latin America
and a summary of the mitigating actions we've taken to address these
conditions. I will follow with our third quarter results and then move
on to a discussion of our full-year guidance.
DLA continues to suffer from further economic and political
deterioration in Venezuela, Brazil and Argentina. In Venezuela, the
Bolivar has devalued almost 45% this year. And there is significant
economic decline due to political unrest. In Brazil, the Real has
devalued by 25% in the third quarter, mostly related to uncertainty
surrounding the presidential elections. In Argentina, although the
currency has held at around 3.7 pesos per dollar, the economy has not
yet shown signs of improving.
In reaction to the downturns in these markets, DIRECTV Latin America
has increased its focus on cash conservation overall and growth in
Mexico and Puerto Rico, where we continue to experience rapid
investment payback.
In addition, DIRECTV Latin America has reduced G&A expenses by
approximately 25% from 2001 levels, largely due to a reduction of 35%
of the workforce. Furthermore, our programming costs have been
significantly reduced through negotiated devaluation and rate relief.
We have also decreased discretionary sales and promotion expenses, as
well as eliminated all non-critical business activities and capital
expenditures.
In the third quarter, the conditions in Venezuela, Argentina and Brazil
had a significant impact on revenues, subscribers, and EBITDA. Third
quarter revenue was $146 million versus 201 million in the same period
in 2001. The decrease in the quarter is more than explained by the
impact of the devaluations in Argentina, Brazil, and Venezuela, with
Argentine devaluation alone amounting to $44 million of the decline.
In the quarter, DLA lost 65,000 subscribers, primarily due to losses in
Argentina and Venezuela, where we have drastically cut back on SAC and
increased prices by 62% and 50%, respectively, which is consistent with
our cash conservation and risk mitigation strategies. We have naturally
seen resulting reductions in gross additions and increases in churn.
Third quarter EBITDA was negative 29 million versus negative 17 million
in the same quarter in 2001. The deterioration in EBITDA is due to
lower revenues of 55 million and higher bad debt reserves of 6 million,
partly offset by significant programming and SG&A reductions.
Given the economic challenges in Latin America, we have revised our
full-year outlook to incorporate the negative effects of the current
actual devaluations, increases in bad debt reserves, the predictions of
the economists for exchange rate changes for the balance of the year,
the mitigating impacts of expected fourth quarter improvements in
programming rate reductions, and the benefits of our G&A and SAC
reductions.
We have also reduced our growth initiatives to preserve cash. And thus,
we've lowered full-year revenues to a range of 670 million to 700
million, from a range of 745 to 765 million. We have also increased the
EBITDA loss for the full year to a range of negative 180 million to a
negative 200 million, from negative 135 million to negative 155
million. Net adds for the year have been lowered to approximately
breakeven from a prior range of 120,000 to 140,000.
As a result of actions we've taken, when the markets improve, we will
take advantage of our leaner cost structure and improved operating
margins in order to re-energize the growth in those markets that
justify the investment. In this regard, DIRECTV Latin America
anticipates being EBITDA positive for the full year 2003.
With that, I'll turn the call over to Pradman Kaul for an update on
HNS. Pradman.
Pradman Kaul: Thanks, Kevin. The telecom market continues to be very difficult,
with all the major telecom indices falling in the third quarter.
Despite this tough environment, HNS generated revenues of $300 million,
18% above the prior quarter. It was also in the middle of the guidance
range provided in our July call.
While this revenue was 12% below the third quarter of last year, we
believe it's significantly better than most of the telecom industry,
particularly our major competitors. The decline versus prior year is
almost entirely due to lower sales in our Carrier segment.
Comparisons for this segment are expected to be negative throughout the
year, primarily due to substantial completion in 2001 of large projects
for XM Satellite Radio and Thuraya Satellite Telecommunications
Company.
HNS continued to demonstrate its strength in the set-top box market,
having shipped 737,000 DIRECTV units in the third quarter, a 47%
increase compared to the 500,000 units shipped
during the same quarter last year. This continued a favorable trend in
our set-top box business, as we meet the needs of DIRECTV's growing
subscriber base.
As a result, third quarter revenues in our set-top segment grew by 33%
compared to prior year. We're looking forward to the fourth quarter,
during which we expect to ship our 10 millionth DIRECTV receiver
system. During the quarter, we also plan to launch the next generation
TiVo system.
We believe that we continue to win the majority of VSAT contracts and
solidify our leading market position with enterprise customers. During
the third quarter, HNS booked numerous multimillion-dollar orders with
leading companies, including one that we converted from our primary
competitor.
Third quarter revenues in this segment were up 1% compared to the
previous quarter and down 3% compared to the same quarter last year.
The number of consumer and single-site small office/home office
DIRECWAY subscribers grew to over 138,000. This is 12% higher than
where we stood at the end of June and a 59% increase over prior year.
During this quarter, we implemented several initiatives aimed at
accelerating consumer DIRECWAY subscriber growth and enhancing the user
experience. DIRECWAY offered through DIRECTV recently launched a
continuously running infomercial on Channel 227 of DIRECTV and is
preparing to increase the frequency of commercials directing viewers to
that channel. This, combined with continuing targeted direct mail and
email promotions, served to educate consumers and stimulate the
purchase decision.
We also continued to expand national retail distribution. DIRECWAY is
now available through kiosks at all Best Buy, Circuit City, and Gateway
Computer stores. We continue also to develop the MyDIRECWAY Web site to
build a relationship with customers once they sign up for the
service. High quality streaming audio and speed tests have proven
popular. And over 1/3 of eligible users have now registered at this
site.
Based on performance to date, we are refining our subscriber forecast
and expect to finish the year with approximately 175,000 subscribers,
which would represent a 75% increase over last year.
Excluding one-time charges for inventory and severance, HNS's third
quarter operating EBITDA was negative $17 million, a $6 million
improvement over the third quarter of last year. Satellite broadband
improved as the consumer offering continued to build critical mass.
Set-top boxes also improved because of volume gains. However, cost
reductions in the Carrier business could not fully offset the margin
impact of the sales decline.
Regarding SPACEWAY, I would like to remind you that we provided an
in-depth presentation at the end of July. Feedback from that meeting
was positive. And we intend to provide additional information as
SPACEWAY moves closer to launch. In the meantime, we remain intensely
focused on this important strategic initiative.
Looking nearer term, we're trimming our sales guidance for the fourth
quarter. Although our competitive position remains strong across all
major product lines, in the current economic environment, it is
unlikely that we will exceed last year's record fourth quarter.
As a result, we now project fourth quarter sales of approximately $400
million, bringing the full-year estimate to around $1.2 billion. The
satellite, broadband and set-top segments should grow, but continue to
be offset by negative comparisons for Carrier.
We expect to continue seeing EBITDA benefits from a growing consumer
DIRECWAY subscriber base and focus on reducing both product and
operating costs. However, these structural cost
reductions have resulted in approximately $10 million of severance
costs for the year. We are changing EBITDA guidance to minus 85 to $95
million as a result of these severance costs and an inventory
provision.
Looking forward, we are encouraged by a strong position in key product
and service markets. Our technological expertise continues to yield
leading products to better meet the customer needs. Not only does this
position us well in the short term, but it also paves the way for
further success in the satellite broadband business.
At this point, I'll turn the call back to Jon. Jon.
Jon Rubin: Thanks, Pradman. Now let's move on to questions you may have
about the Hughes third 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're Web-casting this call
live on the Internet. And an archived copy will be kept on our Web
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 are ready for the
first question.
Operator: Thank you. Today's question and answer session will be conducted
electronically. Press the star key followed by the digit 1 on your
touchtone phone. We will come to you in the order that you signal.
We'll pause for one moment to assemble our roster.
Again, to ask a question, press star 1 on your touchtone phone. Our
first question comes from Mark Nabi with Merrill Lynch.
Mark Nabi: Good afternoon, everyone. How are you today?
Jack Shaw: Fine, thank you.
Roxanne Austin: Good, Mark.
Mark Nabi: Just - I'll start off with just two questions. First, Roxanne,
I'm looking at your expectations for the fourth quarter. And I saw - I
guess you did $196 million of EBITDA in the third quarter. And then
this number's going to go down in the fourth quarter.
I'm actually a little confused. And what I'm trying to figure out is -
why would the number go down? If your ARPUs are going to be up in the
fourth quarter, one would think that the pre-marketing cash flow margin
should be roughly at the 40% level. And I understand about your SAC
going up. But it's still - it's off by a dramatic amount. I would think
that number should be higher than where it is, particularly if you're
saving money on the expense side. That's the first question.
Roxanne Austin: Let me ask Mike to take you through it.
Mike Palkovic: Yeah, hey, Mark. The biggest impact is SAC. It's about a $40
million impact due to higher gross and a little bit higher on the rate.
And pre-marketing cash flow is down a little bit, primarily because
it's largely sports revenue driving the revenue increase in the
quarter.
Mark Nabi: So usually what is your pre-marketing cash flow margin in the
fourth quarter, when you have the Sunday NFL Ticket?
Mike Palkovic: It'll be around 38-1/2, 39%.
Mark Nabi: Wow, okay. So that's down a lot.
Mike Palkovic: It's slightly down from the third quarter.
Mark Nabi: But I guess a lot of the expense savings you were talking about -
you would experience.
Mike Palkovic: They should continue just the way they have in the third
quarter.
Mark Nabi: Okay. That's my first question. Second one - it relates to the
NFL package. I know everyone asks about it. I'm just curious from the
standpoint of package getting stale or not. I mean, roughly, let's say
there are between 900 to 1 million subscribers that take the package,
and obviously, people that sign on an ongoing basis. But is it worth
continuing to sign on for it - number one? And two, I mean, where do
you stand within that negotiation process?
Roxanne Austin: Well, we are in discussions with the NFL currently. And those I
would characterize as going fine - no major issues. I think at the end
of the day, NFL SUNDAY TICKET is something that we like to be able to
offer our customers, we'll continue to want to offer to our customers.
So we'll continue those discussions and hopefully resolve those things.
Mark Nabi: Okay. And just last question relates to, I guess, the card
swap-outs process. Looking - if you look on the Internet, you can find
that you can - there are hackers, unfortunately, I'd say out there
today. You can get the most recent DIRECTV card hacked - P4, as you
classify it, and get the service at a reduced price or for free.
Where do you stand with respect to how many of your P2's have been
swapped out and P3's, and obviously to try to complete the P4 process,
where everyone's on the same card hopefully?
Roxanne Austin: We completed the P2 card swap-out, Mark. We finished that right
around the end of September. We had almost 2.3 million cards in total -
about 1.9 million customers that were completed. So those have been
successfully done and swapped out, the only effect being the blips that
we saw once we started running the onscreen displays.
And once we started actually shutting down pay channels, we saw the
rise in churn that you saw. And you could also see that if you went
into some of the pirate chat rooms that you referred to - them
thoroughly indicating that these issues were having an effect on their
service.
We are not discussing -- and you can appreciate why -- our P3 process
about when we're actually starting the P3 change out and how long that
will take and exactly how we're going to do it. And you can appreciate
why, because as you read in the chat rooms, as soon as the pirates know
it, they start working on activities to try to affect it. So you can
appreciate why I can't say more than that about P3.
Mark Nabi: No, I fully understand. I wish you all the best on that front.
Roxanne Austin: Thank you.
Mark Nabi: I'll let other people ask questions. And thanks very much.
Roxanne Austin: Thanks, Mark.
Operator: Our next question comes from Karim Zia with Deutsche Bank.
Karim Zia: Thanks. I'll keep my questions to two, as well. Roxanne, on the
issue - you cited for the third quarter spike in churn, is there any
way to quantify what residual effect there may be from further
swap-outs or any comfort you have that that won't be a continued churn
issue?
Roxanne Austin: Well, obviously, we had no way of knowing the effect we had on
P2, Karim, as you can appreciate, until we actually started the
process. And we didn't see the blip until we actually starting
affecting people's service, when we started putting on onscreen
displays and actually shutting down the pay channels. So that was
something that, quite frankly, we had no way of estimating.
Now there are reasons why we believe that P3 should not have the same
effect, although we have still again no way of knowing how many
"partial pirates" may be out there or real pirates may be out there.
One thing that we do know is that the P3 card has allowed us to do much
more aggressive electronic countermeasures than the P2 allowed us to
do. The P2 had more limited capabilities in that regard. And so we have
been aggressively running P3 electronic countermeasures continuously
for the last year and will continue to do so up until the actual card
change-out, whenever that occurs.
Karim Zia: Okay, and secondly, it looks like the suspended subscriber count
has been declining. Can you explain what would be driving that? Have
you changed the policy or accounting of suspended subscribers over the
last few quarters?
Roxanne Austin: No, I think we actually believe it's just seasonality. There
tends to be a seasonality that - geared around when people are leaving
for the summer months and then coming back in the fall.
Karim Zia: Okay, thanks a lot.
Roxanne Austin: Thank you.
Operator: We'll take our next question from Vijay Jayant with Morgan Stanley.
Vijay Jayant: Good afternoon. The question, Roxanne, really - if in this
third quarter, you had 50,000 customers you proactively shut down, you
would have probably down over 250,000 net adds. And now going into the
fourth quarter, which is seasonally the strongest quarter, why isn't
the guidance higher than 300,000?
Roxanne Austin: Well, I mean, I think we've looked at where we believe all of
our retail partners will be in Q4, Vijay. And maybe I'm being a little
conservative. But I think we want to be sure that we can achieve our
goal. And that's something that certainly entered our mind as we set
that guidance.
The soft economy - which I think does - as I said in my remarks, I do
believe the soft economy will continue. I think, based on the meetings
that we've had with every one of our major distribution partners, I
think they believe that the soft economy will continue. And while we
had some optimism going into the fourth quarter, I certainly have
probably been a little cautious there.
Vijay Jayant: A question for Mike - and then I'll stop. Is there still a goal
for having free cash flow for the full Hughes enterprise in 2003? And
if that's the case, when do you anticipate that?
Mike Gaines: That would still be a goal. I guess I'd just like to, on the
definition of free cash flow, exclude from that any payment we would
make to Boeing. As I said on the last call, that we - because of the
status of the arbitration, that was pushed out into 2003. If you
exclude that, though, our goal is still to be free cash flow breakeven
in 2003.
Vijay Jayant: Great, thanks.
Operator: We'll take our next question from Robert Peck with Bear Stearns.
Shlomi Yedid: Yeah, Shlomi Yedid here for Robert Peck over at Bear. Just a
couple quick questions. The first one is on insurance. It looks like
DIRECTV 1, 2, and 3 - the insurance has expired. And I wanted to find
out what you guys are looking to do with that. Thanks.
Mike Palkovic: Yeah, hi, it's Mike. Yeah, we've looked at that. And I think
our position on that is going to be to recommend that we do not take
in-orbit insurance on those three satellites. The way the market is
today, the likelihood of getting any kind of insurance that would be
meaningful, given the anomalies, would drive the premiums to an
unacceptable rate. So we're probably going to recommend passing on
in-orbit insurance.
Roxanne Austin: And we also have in-orbit backup now that I think fully
protects us from a service disruption standpoint. So it purely would be
protecting the balance sheet only in the form of this insurance. So
based on, as Mike said, the cost of the insurance, the number of
exclusions by the insurance agencies that we'd be working with, I think
our position is that, since we do have service backup, there'd be no
disruption to customers. We would likely decline insuring those
satellites.
Shlomi Yedid: Thanks. And my second question is just regarding the West Coast
ports being closed for a couple weeks. I wanted to know how that
affects your 4Q net adds, if at all, given that some of the parts are
probably coming from overseas. Thanks.
Roxanne Austin: It shouldn't affect it.
Shlomi Yedid: Okay, thank you very much.
Roxanne Austin: Thank you.
Operator: We'll go now to Tom Watts with S. G. Cowen.
Tom Watts: Hello, everybody.
Roxanne Austin: Hi.
Tom Watts: Just a - for Mike, just a little further clarification - you had
mentioned on the credit facilities, you expected to be drawn by about 1
billion at the end of this year. How much additional cash need would
you need during `03 to get to free cash flow breakeven? And would that
be fully funded with - if you put a $2 billion facility in place, even
without the PanAmSat breakup - PanAmSat purchase of the - or the
breakup fee?
Mike Gaines: Well, the number I used for the total amount of availability
under the credit facility in the neighborhood of 2 billion - don't
expect all of that. Some of that would be a revolver, obviously, hope
not to draw on it. So I think the goal is - that would be more than
enough to get to cash flow breakeven. Obviously, in the situation where
we receive the PanAmSat or the breakup fee, we'd be able to pay all of
that debt down.
Tom Watts: Okay.
Jack Shaw: And the breakup fee.
Mike Gaines: Yeah, I'm sorry - the breakup fee and the PanAmSat proceeds -
more than enough to pay down the outstanding debt.
Tom Watts: Right. And then also - in the recent SPOT credit agreements, are
there any provisions for upstreaming cash to General Motors at all? And
then how much could be sent up to GM with that - assuming the merger -
assuming PanAmSat stayed within Hughes.
Mike Gaines: The PanAmSat credit agreements generally don't allow much
upstreaming of cash. So that would not be a source.
Tom Watts: Okay.
Mike Gaines: Of cash up to GM.
Tom Watts: Okay, and then also just a follow-up to Roxanne - on the NFL
SUNDAY TICKET negotiations, when should we look for a decision on that
or a finalization of those discussions?
Roxanne Austin: Well, I think, as I said, Tom, I think they're ongoing. And
certainly we would like to begin our new year 2003 with an agreement in
place. That's certainly our goal.
Tom Watts: Okay, thanks very much.
Roxanne Austin: Thanks.
Operator: Our next question comes from William Kidd with Lehman Brothers.
William Kidd: Roxanne, I think my question might fall into your domain. I was
wondering if you could give us some information as to where subscribers
are coming from or is it being - how much of your 680,000 net adds are
coming from local markets and what retailers or what retail channels
are being the drivers? And to the extent that you can compare that to
say nine months ago, a year ago, that'd be helpful.
Roxanne Austin: Well, I think this is your lucky day, William, because I
actually have Steve Cox, who's our Executive Vice President of Sales
and Distribution, here with me today.
William Kidd: Excellent.
Roxanne Austin: So why don't I ask Steve to comment.
Steve Cox: Sure. A couple of points - one, in terms of where the strong horse
is and particularly compared to nine months ago, it isn't - what we
have seen is a much broader array of contributors to the overall bottom
line number. We are not nearly as dependent as we have been really
historically on any one particular channel or any one particular
retailer or distributor within that channel. So I think overall, it's
coming from a broader set of contributors.
I don't remember - was the first question - I don't -
William Kidd: I guess in terms of - what particular market segments - rural,
urban, urban with local, those types of differences.
Steve Cox: They're consistent with what we saw in the second quarter and the
third quarter. We saw significantly greater contribution out of the
local channel markets, which is not surprising. We have been heavily
promoting the $39 price point, which includes the local channels in
those markets. And those continue to substantially outperform the
non-local channel markets in terms of overall contribution.
Within the actual distribution itself, we are seeing more contribution
coming from some of our independent partners, including our independent
partners, in particular, who focus on direct marketing tactics. We are
frankly seeing some greater contributions from our own direct sales and
direct marketing channel, as that message gets out there in terms of
easy affordability and the recurring $39 price point.
William Kidd: Can you quantify the gross add mix that's coming from local
markets, one? And two, is that - is it all concerned that your ability
to serve more and more of the population with local signals is going to
decline in the future? And therefore, do you think that you're going to
see some gross adds deterioration as a result say - three, because you
have less local coverage?
Steve Cox: On the first point, we saw close to 70% of our gross additions
coming from the local channel markets in the third quarter, which again
is very strong - continued strong performance relative to the non-local
channel markets.
On your second point, I guess I would make a couple of observations.
One, we do think there is still a substantial amount of opportunity
left in those local channel markets that we're serving today, where
we've really only had nine months under our belt of being able to tell
that complete cable replacement story, relative to the spot beam
satellite that we launched and the $39 price point. So in those markets
where we are today, we really feel there is still substantial
additional growth opportunity that we'll be going after strongly in
2003.
The second piece of that is - we do have the ability, particularly when
we launch a new satellite towards the later part of next year, to add
additional markets to the mix beyond the 51 that we're serving today.
So we think there's still a good local channel story we can tell in
2003.
William Kidd: Great, and the last question - Mike, with respect to the Boeing
purchase price adjustment, has anything changed there? Is the timing
still late '03? Is the exposure still exactly the same? And has there
been any progress in the case that you can mention?
Mike Gaines: I would say that pretty much our comments from a quarter ago
are still applicable - that we expect a resolution to the arbitration
sometime in mid to late '03 - really not a lot different since then.
William Kidd: Great, thank you.
Operator: Our next question comes from Armand Musey with Salomon Smith Barney.
Armand Musey: Good afternoon, guys. I may have missed this. But could you walk
us through a little bit of how you get to the reduction in cash needs
from 1.2 to 1.4 billion down to 700 million. I saw the - obviously the
asset sales - those total about 316 million and about 25 million less
EBITDA. I'm trying to figure out where the gap comes from.
Mike Gaines: I think the rest of it really comes from improvements in
capital expenditures and in working capital at all of our businesses.
Armand Musey: Any place that's significantly - because that's a big reduction
in working capital and cap ex?
Mike Gaines: I think DIRECTV is doing a very good job on working capital.
And I think you'd also see in Latin America, we're significantly
ratcheting down capital expenditures.
Armand Musey: Okay. With respect to the selling of DIRECTV in the certificate
program, do you expect to roll that - the sales plan out to other
consumer electronic stores?
Steve Cox: This is Steve Cox again. We're looking at some tests. And we have
done some tests in some of our other consumer electronics channels.
There was certainly at the more immediate in both elegance and need
from a Blockbuster and Wal-Mart standpoint - Blockbuster in terms of
not being a place that wanted to dedicate the space on their floor to
carrying inventory. So it fit a need there - and then Wal-Mart in terms
of our desire not to put our goods into that environment. So both of
those - we were specifically addressing an opportunity or a need.
We are looking at it across actually a number of our different
distributors in terms of potentially some tests and seeing how well it
works and particularly as the type of tactic that could be used to
attach a DIRECTV system, for example, to a digital television set. So
there are some specific types of benefits we see in some of those
channels, but nothing as aggressive as what we've done in those first
two.
Armand Musey: Okay, the final question is - could you talk to us a little bit
about how you project DIRECTV subscriber adds, how you sort of come up
with the guidance numbers, kind of internal process that you go through
to get that?
Roxanne Austin: Yeah, we actually spend a lot of time talking directly with all
of our retail partners. We have folks on Steve's staff and Steve who
spend time -- and I've spent time myself in some of our major
distribution channels -- in talking with the folks that are actually
seeing what's happening out on the floor and talking to them about
their - what they're doing.
From a bottoms-up basis, what are we doing in the marketplace in
advertising? What are they doing in the marketplace for advertising?
What kind of offers are available in the store? What special things
will they be doing in trying to come up with a bottoms-up look at what
we think, across all of our distribution, we're able to garner.
Armand Musey: Okay, thank you very much.
Roxanne Austin: Thanks.
Operator: Our next question comes from Ty Carmichael with Credit Suisse First
Boston.
Ty Carmichael: Thank you. I just wanted to further clarify the nature of
the promotions that are going to drive the SAC higher, if you could
just expand a little bit on that.
Mike Palkovic: Tye, it's Mike. Most of the SAC increase is the NFL offer,
the acquisition offer, in the third quarter. You have to record that as
you fulfill the three months of that offer. So that's going to hit us
throughout the fourth quarter. That's the majority of the impact.
Roxanne Austin: Remember, we gave four months of premium programming, Tye, for
free during the third quarter offer. And that gets amortized as the
customers actually enjoy that benefit in the fourth quarter.
Ty Carmichael: So that discounted - the way you account for it - the way
you account for the discounted programming is - you still record the
costs that are going through...
Mike Palkovic: Yeah, the cost that's in our SAC is the out-of-pocket
programming costs to fulfill that offer. The fact that the revenue is
not there is a reduction in ARPU.
Ty Carmichael: Okay, so you don't flow that - you don't flow through - the
programming costs through the income statement as part of programming?
Mike Palkovic: Oh, yeah - no, it is part of the income statement. We also
reflect it in our SAC as an out-of-pocket expenditure.
Ty Carmichael: Okay. And then just - I would like to get an update on the
relationships with Circuit City and Best Buy, in terms of - how - where
are we in terms of renewing those agreements? And do you have
expectations and a desire to maintain exclusivity through those
channels, given the costs that you may have to incur to do so?
Steve Cox: Sure, Ty. This is Steve again. We actually have gone out through
all of our distribution over the past six to nine months and
renegotiated virtually every major agreement that we have in
place. And a lot of that was just sort of updating the status of the
things we do together to reflect the business today. A lot of that was
tied to when we put annual commitments in place. Some of it was tied to
when we did our repackaging. There were a number of factors that we
wanted to clean up as part of that.
In terms of the two, as you've specifically asked about, without going
into detail about either of those relationships, I can tell you we are
in contract with both of them. We have a very positive relationship
with both of them. And we do see long term - we do see a continued
relationship with them that's comparable to what we have today.
Ty Carmichael: Can you just provide any clarity on when the - is there any
type of a set deadline by which you have to have renegotiated Circuit
City and Best Buy?
Roxanne Austin: We're done.
Steve Cox: We've completed...
Ty Carmichael: But for - is that for another year or six months or -
Steve Cox: Again, I'd be hesitant to get into that without their blessing, in
terms of the term and the terms. But I can tell you that we do have
longer-term agreements with them. And it is our strong belief that
they're going to remain focused on our service going forward.
Ty Carmichael: Okay, and then just to follow up on the subscriber
acquisition cost expectations for the fourth quarter, if you could -
how about if - just to provide a better comparison to at least the
EchoStar reports - that if you were to just include the programming
costs flowing through your programming line, what would the
pre-marketing cash flow margin look like in that scenario? And
then what would your SAC look like? So basically if you just
re-bucketed the programming costs as programming costs and then...
Mike Palkovic: The impact of SAC for that is about $20 in the quarter. The
impact of pre-marketing cash flow would be...
Jack Shaw: Hang on, Ty. He's got his calculator going.
Mike Palkovic: About a point and a half.
Ty Carmichael: And so, given that it's just related specifically to the NFL
SUNDAY TICKET, should we then expect your - the definition - DIRECTV's
definition of SAC to go down in - I guess into the fourth quarter, into
the first quarter of '03, holding all those equal?
Roxanne Austin: Yeah, except the only issue being again the rate of second and
third sets. That's the only issue that will be driving our SAC higher.
Everything else remains constant with the level that you saw prior to
the fourth quarter amortization of the NFL.
Ty Carmichael: Okay, thank you.
Operator: Moving next to Matthew Harrigan with Janco Partners.
Matthew Harrigan: Most of my questions were answered. But mechanically, the big
delta in the Other line - is that just attributable to the Thomson
share gain?
And then secondly, I don't think this is prohibited under the merger
discussion. You have to look at doing something down in Latin America
with Sky, really whether or not EchoStar happens.
Can you talk a little bit about the technical and regulatory barriers
to that, since it's in so many markets? Or would you just prefer to
defer commenting on that?
Mike Gaines: This is Mike. Let me start with your question about the other line.
Matthew Harrigan: Right.
Mike Gaines: In 2002, there was a gain from the sale of the Thomson shares of
158 million, which pretty much gives you kind of the bulk of the
change. In the prior year, we actually had a write-off on our
SkyPerfect shares also, causing the swing.
Matthew Harrigan: Okay.
Jack Shaw: Would you restate your second question, please? This is Jack.
Matthew Harrigan: Well, irrespective of whether EchoStar happens or not, you
could well end up merging your land services with Sky. Can you talk
about what the engineering hurdles are to that, in terms of the boxes
and the satellites and also what the regulatory approvals would be of,
I guess, (Comitel) down in Mexico and how complicated a process that
would be.
Jack Shaw: I think we've probably got to defer from that. I apologize to you. It
is a convoluted process, though, I can tell you that. Eddy, have you
got anything?
Eddy Hartenstein: Yeah, we have looked at that, Matthew. You are correct, it is
complicated. There are many parties involved. We are looking at that
situation in both an operational sense and where we would go in the
future. We'll have more on that hopefully as - in the not too distant
future.
Matthew Harrigan: Thank you.
Operator: Our next question comes from Ray Schleinkofer with Thomas Weisel
Partners.
Ray Schleinkofer: Yes, during the second quarter, there was some confusion at
Blockbuster as you started to implement the certificate program. Could
you give us a little bit of a sense of sort of how sales have been
going in that channel, now that that program's been in place for a
little while?
Steve Cox: Sure, Ray, yeah, we implemented that program at the end of April and
got the transition essentially complete by the end of April, early May.
And there was frankly a bit of a slower uptick than either one of us
had hoped, relative to getting that program actually starting to
deliver customers for us.
I would say, without going into specific numbers, Blockbuster has been
- was a steady performer for us in the third quarter. And our
expectation is that it will continue to be in the fourth quarter.
They - we've spent - as Roxanne said earlier, we've met with all of our
key distribution. And we met with senior management at Blockbuster
within the past month or six weeks. And by every indication, they
remain committed to the partnership.
So while it certainly isn't delivering the extremely strong numbers
we've seen at some points in the past, it is delivering steady numbers.
We've seen them get behind the NFL offer and some of the activities
we're planning for the fourth quarter.
Ray Schleinkofer: That's great. And then just - you mentioned multiple set-top
boxes. Do you have a percentage there for the number of homes that are
taking multiple set tops?
Mike Palkovic: Right now - this is Mike - right now, we average about 1.5 across
the entire base with new customers coming in. That number has been
trending up to about 1.6, 1.7 for new customers coming in.
Ray Schleinkofer: That's great. Thanks, guys.
Roxanne Austin: Thank you.
Operator: Our next question comes from Blaine Marder with L.R.L. Capital. Mr.
Marder.
Blaine Marder: My question's been answered. Thank you.
Operator: Okay. We'll go to Rob Kaimowitz with Bull Path Capital. Mr. Kaimowitz.
Rob Kaimowitz: Yes. ((Inaudible)).
Operator: Your line is open, sir.
Rob Kaimowitz: Yes, hi, thank you. Good afternoon.
Mike Gaines: Hi.
Roxanne Austin: Hi, Rob.
Rob Kaimowitz: Regarding the churn in the quarter - and most of that was related
to folks that were partial pirates, is what you were - I was trying to
understand it a little better.
Roxanne Austin: Well, the thing, Rob, these were paying customers.
Rob Kaimowitz: Right.
Roxanne Austin: Okay, so they were customers who had an account with us. And
they were taking basic services. And...
Rob Kaimowitz: And they were stealing the premium services.
Roxanne Austin: That's our - that is what we believe, based on the fact that
once we started to run the onscreen displays and actually once we
started shutting down - we started shutting down sort of - in a 100
series at a time.
Rob Kaimowitz: Right.
Roxanne Austin: The premium services - that we saw this huge spike in churn. It
started in July, accelerated into August and into September. And based
on the fact - we started doing analysis on these customers in August,
we found that this group had a disproportionate level of no phone line
connected to the box, which once again, is another signal - the fact
that they had no intention of paying for premium services.
Rob Kaimowitz: Understood. And where might they have gone, if not - if they're
turned off altogether, now they either have to pay their cable or pick
up somebody else or get another pirate to get you totally for free.
Roxanne Austin: Well, I'd only point you to their Web - their own chat rooms.
They talk about moving on to other services and that's an array.
Rob Kaimowitz: Understood, okay, thank you.
Operator: Our next question comes from Victor Hawley with Reed, Conner and
Birdwell.
Victor Hawley: Regarding the 50,000 loss, I take it that - I mean, obviously you
were doing this program to get rid of pirates. Were you expecting a
smaller number than the 50,000? Or were you not expecting that there'd
be any paying customers that would be pirating - that all pirates would
be non-paying?
Roxanne Austin: Well, understand, Victor, that we had no way of ever estimating
this number. And remember, put it in context - the 2.3 million cards -
that over 95% were successfully swapped out at the P4. So this was a
minor portion of this population. So we had no way of estimating it -
is really the answer.
We obviously had suspicions that there were people who were partial
pirates, based on our monitoring of pirate Web sites, et cetera. But we
had no way of estimating how many people that might have been.
Victor Hawley: Great, well, I guess what I'm trying to get at is - in your
initial guidance for the quarter, I'm assuming - regardless, that you
thought there would be some of these people. And I'm trying to figure
out how much of the 50,000 was already in your original guidance? And
therefore, how much was just soft economy, slow sales, up the
shortfall?
Roxanne Austin: We really didn't assume there would be any significance to the
number of "partial pirates" in this number.
Victor Hawley: So it was of - kind of out of left field.
Roxanne Austin: Well, understand...
Victor Hawley: In terms of the magnitude.
Roxanne Austin: That's exactly right. I mean, remember, we started the card
change, Victor, back - way back in late March, early April.
Victor Hawley: Right.
Roxanne Austin: And it was going very successfully. And we saw no unusual
changes in churn. You saw this huge dramatic increase in July, August,
when we started physically affecting their signal. And once we started
physically affecting their signal and physically affecting their
services, that's when we saw the large spike.
Victor Hawley: And so, given that you have about 3-1/2 times as many P3
customers -- and you mentioned earlier that you think that ongoing
countermeasures are probably helping -- you're not expecting 3-1/2
times as many as this to be hit when you swap over the P3's.
Roxanne Austin: Well, as I said, I really have no way of estimating that,
although as I said, we do believe that the electronic countermeasures
and other activities that we've been doing with the P3 cards should
have a difference between the two.
Victor Hawley: All right, thanks.
Roxanne Austin: Thanks.
Operator: We'll go next to Sam Hillers with Highfields Capital.
Jon Jacobson: Hi. It's actually Jon Jacobson at Highfields. How do you think
about continuing to pour more money into DSL? And at what point do you
say, "Uncle" there? And also in Latin America - I mean, is this process
just going to perpetuate itself, as shareholders' money continues to go
down the tubes?
Jack Shaw: This is Jack. Both Latin America, and as I said in my opening
comments, and Telocity broadband are areas where we've - we're
expending a lot of time and money and looking at the options that we
have. We're - in the case of Latin America, it's quite a complicated
formula because of all of the partners, because of all of the countries
and because of different economies.
We understand the urgency of taking some action. And we will share that
action with you as soon as we have come to a final conclusion.
Jon Jacobson: Okay, just so you understand, I mean, it seems like quarter after
quarter, I mean, given the operating environment, you continue to make
great strides at DIRECTV. And those two areas continue to get worse.
And the shareholders continue to vote with their feet. And a lot of
value's been destroyed. And it doesn't make any sense.
Jack Shaw: I understand, Jon. Thank you.
Operator: We have a follow up question from Marc Nabi with Merrill Lynch.
Marc Nabi: Just one thing related to cap ex - is - have you shown any
significant reductions on cap ex? I know you showed it on the side of
PanAmSat. What about with respect to DIRECTV? Mike, you had said
initially some of the savings on the cash outlay side was through
working capital. Is there anything significant on the cap ex side,
either through A, HNS and SPACEWAY, or B, just DIRECTV U.S.?
And also, I think you also did a lot of - not a lot, but on a relative
basis, a decent amount of capital expenditures at Galaxy Latin America
- I'm sorry DIRECTV Latin America. And maybe now that what's happening
there, you'll just significantly reduce that number, as well.
Mike Gaines: Let me start with the DIRECTV Latin America. And that's what I was
referring to earlier. We have significantly reduced cap ex in Latin
America in terms of retrieving old boxes and really not buying new
ones. As you know, there's a lease model there. So that's been a
significant factor in cap ex in Latin America.
Marc Nabi: Mike, could you quantify that? How large of a number - assuming...
Mike Gaines: I don't have one at my fingertips. We could certainly get back to
- Kevin, do you happen to know what...
Kevin McGrath: Yes, I do. Last year, our capital expenditures, which is box cap
ex, installation and non-box cap ex - was $260 million. Our forecast
for 2002 is $77 million - so obviously a huge difference.
Roxanne Austin: And as it relates to DIRECTV in the U.S., we've reduced our
expectations for capital expenditures. We had originally estimated that
we'd be somewhere in the $550 million range. We're now projecting those
to be $400 million. And those are primarily driven by satellite IT
investments and what we've done with the card change.
Jim Lucchese: Hey, Mark.
Marc Nabi: Yeah.
Jim Lucchese: This is Jim Lucchese.
Marc Nabi: Hey, Jim, how are you?
Jim Lucchese: All right. Also on cap ex, on the SPACEWAY program, we did lower
our cap ex this year by 75 million. But it's basically rescheduled for
payment at the 2003. But it did have a $75 million cash improvement in
2002.
Marc Nabi: Okay. And actually just one other question for Roxanne. Roxanne, I
just want to get a better sense of the personal video recorder - see
what kind of take rates, if any, have they gotten any better? Are they
consistent to where they were six months ago? I'm just trying to see if
that's being a bigger device than what we were all anticipating, or
not, quite frankly.
Roxanne Austin: Well, we're beginning to roll out the new DIRECTV ("Provo") box,
which is a combination DIRECTV/TiVo box that is being built by Hughes
Network Systems. And that could be rolling out in the fourth quarter.
I really believe that you will not see a significant acceleration of
PVR until we get into 2003. We will be heavily looking at promoting
that, not only to new customers, but also into our existing subscriber
base. We've got a lot more quantities of that new box.
And remember, we've changed our relationship with TiVo. So we're able
to actually package, promote, and deal with that product in a much more
effective basis for DIRECTV. So I believe you will see us focusing a
lot on that as we enter 2003.
Marc Nabi: Okay, well, thank you very much.
Roxanne Austin: Thanks.
Jack Shaw: Thanks, Marc.
Operator: We have a follow-up from Vijay Jayant with Morgan Stanley.
Vijay Jayant: Hi, I think this is more for Mike Gaines. I just want to
understand - what's the tax basis for GM in Hughes today? And also
what's Hughes' tax basis in PanAmSat?
Mike Gaines: With respect to GM's tax basis in Hughes, I think we'd have to get
back to you. I don't have that number at our fingertips. And with
respect to our tax basis in PanAmSat, it's dipping to 2 to $2.5 million
range.
Vijay Jayant: Great, thank you.
Operator: We'll take a follow-up from Ty Carmichael with Credit Suisse First
Boston.
Tye Carmichael: Yeah, thank you. I did want to just call upon the TiVo
relationship. Given that - my understanding is you're going to be
assuming full control of those customers. Are you going to continue to
collect the $10 in PVR revenues that TiVo charges those customers
today? And if so, does that account for some uptick in the anticipated
fourth quarter rise in ARPU?
Roxanne Austin: No, there's nothing significant there contributing from that.
What we're actually going to do for our premium customers, our DIRECTV
premier customers - they'll be receiving it for free. And the customers
that are other than premier will be at about half the rate TiVo was
charging - roughly 4.99.
Ty Carmichael: Those customers will see that take effect in the fourth quarter.
Roxanne Austin: In the fourth quarter - it just took effect in October -
October 1.
Ty Carmichael: Was the reason for that - was it just - because it seems like
they were willing to pay that 10 bucks. Was there a reason to lower
that and eliminate the fee? I'm just trying to - I'd like to understand
the rationale behind that.
Steve Cox: Well, we looked at PVR in general. In particular, the high-end
customers - I think you'd understand in terms of trying to reward and
provide additional value to our best customers, which is the free-price
point for the premier customers.
I think when we looked at what was happening competitively with PVR, as
well as just generally having a uniform price point out across that
service that we could promote aggressively, we didn't see any reason to
punish our existing customers and give them a worse deal than the new
customers coming in the door.
Ty Carmichael: Okay.
Roxanne Austin: That will be the price point for new customers. As we think
about it, I said in 2003, trying to accelerate PVR into the marketplace
- that is the price point that we thought would be most competitive and
be able to generate the most from customers overall.
Ty Carmichael: Okay, and then lastly, I believe you announced an agreement
earlier in the year with Starz for an SVOD service. And I was hoping
you could just update us on where we stand with regard to the rollout
of that product and if there's any initial feedback from how consumers
are using it.
Steve Cox: It's probably a little bit early. We have done some - we're trying to
use Starz. And Starz has been a good partner in terms of testing some
SVOD-type applications from a satellite-based delivery platform. But we
really don't have enough data yet to tell you anything meaningful.
Ty Carmichael: When did that roll out?
Steve Cox: Boy, it was during this summer, but I couldn't...
Roxanne Austin: Yeah, I don't remember right off the top of my head. I'm sorry.
Steve Cox: June, July timeframe.
Roxanne Austin: It was that general timeframe - June, July.
Ty Carmichael: Just - is there any type of feedback happening? Are customers
using it? Or are you able to generate - do you think you'll be able to
generate some incremental revenues from that service? Is that something
- 2003 that you're going to put a lot of emphasis behind?
Roxanne Austin: I think it's a little early, Ty. We're going to try to get
through our research with - both them and with us. And then we'll have
a better answer probably as we get through this quarter.
Ty Carmichael: Okay, thank you.
Operator: Our next question comes from Americo Cascella with Ares Management.
Americo Cascella: Thanks. It's already been answered.
Operator: We'll go now to Adam Comora with Entrust Capital.
Adam Comora: Hi, thanks. Can you just walk us through the major pieces - how
you get the free cash flow breakeven in 2003?
Mike Gaines: Are you referring to - compared with this year or just...
Adam Comora: No, I think there was an earlier question that said - are you guys
still forecasting free cash flow breakeven for consolidated Hughes? And
I just wanted to get the major components of that.
Mike Gaines: Sure, let me try at a high level. I don't think we're ready to give
2003 cash flow by business unit. But in general, DIRECTV will continue
to improve significantly. I think with PanAmSat in the fold, it will
also continue to be a solid provider of cash flow. We expect to reduce
the cash outflows in Latin America and at DSL. So those combined
factors should get us there.
Adam Comora: Okay, so you can't really give us ballpark for guidance or for cap
ex, EBITDA, other...
Mike Gaines: Yeah, we have not gotten to 2003 guidance yet. So it'd be premature
to do that. I'm sorry.
Adam Comora: Okay.
Operator: Anything further, Mr. Comora?
Adam Comora: Nope.
Operator: We'll go next to Jay Aston with Neuberger Berman.
Jay Aston: Just a question about ARPUs - in a world, over the next few years,
where multi-channel video product from digital cable is really
comparable to the multi-channel video product offered over the DBS, how
does - what's your thoughts on ARPU going forward? And how do we
continue to take or increase prices over the next couple years?
Roxanne Austin: You know, I think as we look at it, as I said, we're looking at
much more aggressively rolling out our PVR product and trying to get
actual traction there in terms of numbers of customers actually taking
that product as we look into 2003 and beyond.
So I think we do see some opportunities for incremental revenues there
coming from that particular product, as it gets much more wide
acceptance within not only big new customers, but existing base,
because as you remember, we've got 10.9 million overall customers in
DIRECTV. And getting that PVR much more penetrated within that existing
base I think should generate some incremental opportunities for us.
Jay Aston: Using the $62 ARPU number you're speaking of at the end of the year,
where do you project that should be say three years out?
Roxanne Austin: It's hard to say. And as Mike said, it's a little early to be
giving guidance beyond 2002, since I've been told I can't do that or
somebody's going to shoot me here. But I think we do see opportunities
to improve as we go forward, primarily being driven by these types of
opportunities.
And I think you're seeing that our strategy of really focusing on
quality customers is paying off in the ARPU. I mean, it's easy to bring
in a customer in the door that's paying you less than $30 a month. But
it's hard to keep them. And we want to keep them. And we want them to
pay us a lot of money. So that's our strategy. And I think it's working
pretty well.
Jay Aston: Okay, thank you.
Operator: Our next question comes from Jim Hoffman with PSAN.
Jim Hoffman: Yes, good afternoon. Jim Hoffman here. I'm just wondering - with
respect to DIRECTV Latin America, can you please walk us through the
hypothetical alternatives, without necessarily telling us what you're
committed to?
Jack Shaw: Jim, this is Jack. That's really hard for me to do right now. I mean,
obviously, they would go the whole gamut that people have talked about
- about any company that is in such a severe business environment.
And the one thing that I can tell you for sure is that we will not
continue as we are doing now. But past that, I've just got to ask you
for a little more patience. And I promise we'll come to you with what
we believe we're going to do just as quickly as I can.
Roxanne Austin: Let me just clarify on the last question. I want to make sure
that no one's confused. Our full-year ARPU guidance is $59. We tend to
be seasonally higher in our fourth quarter. And so I don't want anyone
to be confused that we'll be entering 2003 at the $62 level from the
get-go - so just to clarify that point. Fifty-nine dollars is our
full-year ARPU guidance.
Operator: Anything further, Mr. Hoffman?
Jim Hoffman: No, thank you.
Operator: Our next question comes from Harry Demott with Gothic Capital
Management.
Harry Demott: A couple of just quick questions - more about just the services.
Can you talk a little bit about just the - how compressed your signals
are currently on the satellites? And what are the opportunities to do
more HDTV over time?
Jack Shaw: I think Eddy Hartenstein is the appropriate person for that.
Eddy Hartenstein: We don't specifically get into talking about compression
rates. We are doing high definition right now. We are also on our
standard channels, always looking to improve, but at the same time,
maintain the quality of our signals.
Also, not all signals are the same. The program content varies -
anything from a very easy to compress, a talking head, to very
difficult - a sports program. So we are looking at, on a blended
average across all our CONUS signals, about 10 or so video channels per
transponder. And improvements - future - we think might be very small
on that going forward. We've really begun to push the limits of quality
here with going any more.
With respect to high definition, we're looking to be able to get to two
high definition signals per transponder - and, in fact, are there right
now.
Harry Demott: Do you mean you have the ability to do it, as opposed to your
offering it?
Eddy Hartenstein: No, we are actually doing it. We have three high definition
channels up and operating right now, with plans for a couple more in
the future. Again, that all depends on making certain that we get our
7S spot beam satellite launched next year, which will need a
reshuffling of our spectrum.
Jack Shaw: Those three high definition channels, Eddy, I think are Channel 199,
509, and 543, if I'm not mistaken.
Eddy Hartenstein: That's correct. That'd be High Def Net, HBO, and Showtime
high def, respectively.
Harry Demott: Right, okay. And then the other - actually I think you may have
answered my other question. So okay, I appreciate it. Thank you.
Operator: This does conclude today's question and answer session. Mr. Rubin, I'd
like to turn the conference 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 don't hesitate calling me or our Investor Relations
Department at Hughes or PanAmSat. Thank you for your attention. Have a
great afternoon.
Operator: This does conclude today's conference call. You may disconnect at this
time.