EchoStar Corporation

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Good day and thank you for standing by. Welcome to the Echo Star Corporation conference call for fourth quarter 2022 results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Terry Brown. Please go ahead.

Thank you. Good day, everybody, and welcome to our earnings call for the fourth quarter of 2022. I'm joined today by Hamid Akhavan, our CEO and President, Paul Gaske, our Chief Operating Officer, Dean Manson, our Chief Legal Officer, and Jeffrey Boggs, our Interim Chief Accounting Officer. As usual, we invite media to participate in a listen-only mode on the call and ask that you not identify participants or their firms in your report. We also do not allow audio recording, which we ask that you respect. Let me now turn the call over to Dean for the State Harbor disclosure.

Thank you, Terry. All statements we make during this call, other than statements of historical fact, constitute forward-looking statements made pursuant to the safe harbor provided by the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that could cause our actual results to be materially different from historical results and from any future results expressed or implied by the forward-looking statements. For a list of those factors and risks, please refer to our annual report on Form 10-K for the year ended December 31, 2022, filed yesterday with the SEC. All cautionary statements we make during the call should be understood as being applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risks described in our reports and should not place any undue reliance on any forward-looking statements. We assume no responsibility for updating any forward-looking statements. We referred to adjusted EBITDA during this call. The comparable GAAP measure and reconciliation thereto are presented in our earnings release. I'll now turn the call over to Hamid.

Thank you, Dean, and good day, everyone. We have had an exciting fourth quarter. In December 2022, Pratt & Cole announced his retirement, and we would like to thank him for his 50 years of service. This announcement signaled the start of a new era as we aligned the company for success in a changing industry. As of January 1, 2023, Paul Gaske assumed the new Chief Operating Officer role that was established to lead all market-facing global activities. Congratulations to you, Paul. We remain enthusiastic about our future and believe that under a more streamlined management and operating structure, we will drive efficiencies synergies, and greater growth. We continue our search for a chief financial officer and will keep you informed of our progress. As for our agenda for the call today, first, we will provide a brief overview of financial activities from the fourth quarter. After that, we'll discuss our business strategy, which includes the three parallel work streams that I call horizons, and our progress on all three. We'll then move to question and answer sessions. Let's start with our financials. Our revenue in the quarter on the fourth quarter of 2022 was $500 million, up slightly compared to the same period of prior year. On a full year basis, we achieved $12 million of growth. This in spite of the fact that for the full year of 2022, we faced competition from Starlink, which brought significant capacity to the market, we did not have access to the benefits of our upcoming jupiter 3 system the revenue increase in the fourth quarter was primarily the result of growth in our enterprise business while our consumer broadband business has been impacted by capacity constraints and other factors we have continued to increase revenue by capitalizing on enterprise and government opportunities both domestically and internationally this is consistent with my statements in prior earnings calls regarding our continued focus on diversification of the business. Our adjusted EBITDA in the fourth quarter was $164 million, an increase of 3% from last year, primarily driven by lower sales and marketing expense associated with our consumer broadband business. We continue to focus on managing our costs in line with the change in revenue mix to preserve our ability to generate cash. In the fourth quarter, we saw continued momentum in our enterprise business with 195 million of new orders. Our 2022 orders increased 41% compared to the same period last year. Most enterprise orders are recognized over several years, creating a long and a stable revenue stream. We remain excited about opportunities within the enterprise market, the market that we believe will continue to allow us to better diversify our business, both domestically and internationally, and provide cash generation through low capital investment and a scalable operating leverage. Capital expenditures in a quarter were $77 million compared to $86 million in Q4 of last year. The decrease was primarily due to lower spend on Jupiter-3 satellite program and consumer premise equipment. Free cash flow defined as adjusted EBITDA minus CapEx, was $87 million during the quarter and $330 million in 2022. We ended the quarter with $1.7 billion of cash and marketable securities. This is post-purchasing approximately $90 million of our own stock in 2022. I remain excited about the strength of our balance sheet. as it affords us the flexibility to explore investment opportunities that could foster growth, which remains a key component of our business strategy. Let me now turn the call over to Paul, who will provide some additional specifics on the quarter and our Horizon 1 and 2 activities.

Thank you, Hamid. As a reminder, Horizon 1 is our year-term priority to maximize current services and operations, while managing costs as we prepare for the launch of the Jupiter III EcoStar 24 satellite. To that end, we continue to focus on operational efficiencies and yield optimization of our North America satellite capacity. In 2022, we restructured our portfolio of consumer service offerings to better align with market demand by provisioning additional capacity for our customers. We plan to continue to optimize our service plans in 2023 as we await the launch of the Jupiter 3 service. The changes in our service plans have resulted in a natural shift towards higher capacity, higher price plans for our customers, improving our ARPUs while delivering an enhanced customer experience. Additionally, we remain focused on improving our cost structure through deployment of additional automation, improved processes, and supply efficiencies, of course, without compromising the end user experience. In the third quarter of 2022, we launched HughesNet Fusion, adding support for latency-sensitive applications to the traditional HughesNet satellite service, which is optimized to support high-speed applications like video and downloads. HughesNet Fusion utilizes a unique data handling software to seamlessly combine our satellite service with the terrestrial wireless service, providing an exceptional internet experience that is responsive, reliable, and fast. The HughesNet service plans, the HughesNet Fusion plans, have been well received by existing and new subscribers, and we expect the service to help attract new customers and reduce churn while improving articles. Although we continue to see competitive pressures within the underserved market we address, we believe the combination of our optimized service plans and HughesNet Fusion service should help combat competition. Moving to our North America enterprise business, in the fourth quarter, we signed a $9 million managed service contract with a new customer to utilize our secure broadband connectivity. We also received extensions from three retailers valued at approximately $5 million each and continue to see success with contracts and deployments in the retail petroleum and energy markets. In our OneWeb program, deliveries of production gateways continued as planned. As of the end of 2022, we have shipped 32 gateways and expect to complete the total complement of 44 gateways in 2023, in line with our committed schedule and customer expectations. Additionally, we have shipped more than 12,000 satellite subscriber modules for inclusion in OneWeb terminals. We also executed a contract to deliver 7 by 24 operational support for the OneWeb network that includes development of advanced AI management capabilities for the OneWeb ground infrastructure. Our government business ended the year with record revenues. Although the business is still a relatively small scale, it has been growing through the development of network and security management tools for DOD applications and evolving technologies such as terrestrial and 5G NTN networks. As part of our streamlined management structure, we merged our defense and civil government business groups into one cohesive unit to drive efficiencies and expand opportunities for growth in the future. Now to our international operations, we continue to allocate additional capacity to address a wide range of enterprise applications to close the digital divide. In Mexico, we added broadband and sailor backhaul locations for CFE telecom, as well as connectivity services to a major bank. In Colombia, we increased bandwidth to the 670 Antequia schools. In Brazil, we expanded the scope of our services agreement with a major telecommunications provider, to deliver internet and approximately 1,600 rural schools. With regards to our HughesNet service in Latin America, we remain focused on adding high-value subscribers, which is lower in churn, while optimizing yield on our existing Latin American capacity to increase profitability and cash generation. In terms of the Jupiter equipment sales, Jupiter system equipment sales, we had significant orders from around the world. In Mexico, a major oil producer ordered an upgrade for their existing use system and signed a multi-year support agreement. In Africa, a leading telecommunications service provider upgraded their Jupiter system to support network expansion and LTE backhaul connectivity. We also received a sizable order for BGAN terminals to support machine-to-machine communications. In the Middle East, a telecommunications service provider ordered an additional redundant Jupiter gateway to enhance their service offerings. Now let me focus on Horizon 2 activities. These include our efforts to bring Jupiter 3 into service for expansion of our service in North and South America, as well as growing and diversifying our global enterprise offerings. I'm pleased to report that the Jupiter 3 satellite is in the final stages of assembly and launch, which is expected to occur in the second quarter of 2023. As many of you know, in November 2022, we entered into an amended agreement with Maxar. the manufacturer of the satellite, to secure compensation for past delays and to realign remedies to incentivize Maxar to complete the program expeditiously. The compensation provides for relief on approximately $14 million of payments through in-orbit raising and more than $44.5 million plus interest on deferred in-orbit incentive payments. The amendment requires Maxar to pay liquidated damages in the event of further delay. Also, Maxar agreed to enter into an agreement with us where we will provide certain products or services to Maxar during 2023 for payments that will deliver us a margin of at least $30 million. In preparation for the launch of Jupiter 3, the team is focused on developing service plans with higher speeds, more data capacity, and the extension of our HughesNet fusion plan for the ultimate high-speed, low-latency satellite internet experience. We believe the market is eager for these robust offerings, and we plan to have a highly competitive suite of services to meet a variety of our customers' needs once Jupiter 3 enters service. Horizon 2 also has a strong focus on our global enterprise business that includes the government sector. We plan to leverage our business connectivity, managed services portfolio, our hybrid V-O-G-O business solutions, and our own manufactured products to pursue growth. Increased participation in this vast market segment is a key element of our diversification strategy, which includes improving our operational scale with potential small acquisitions, which we will continue to explore. Now let me turn the call back over to Hamid.

Thank you, Paul. I would like to provide an update on Horizon 3, which is our strategy to expand into new markets around the world through both organic innovation as well as potential acquisitions. One significant area of progress is around our S-band opportunities. You probably saw a recent press release announcing our agreement with Astro Digital to begin construction of a global S-band mobile satellite service network. The 28 satellite LEO constellation is primarily targeting IoT services, which we believe is a vast untapped opportunity. The constellation will provide a commercial service that will provide us with a platform for ongoing market development and is a measured next step in terms of building our S-band license portfolio. Some of you may recall that in the second quarter of 2021, we launched our third nanosatellite known as EG3 with a primary mission to bring into use our Syrian-1 ITU filing. This mission was successfully completed in the third quarter of 2021 The satellite provided us with the ability to test a wide range of potential S-band applications and services, which we used in the design phase of our LEO constellation. During the first quarter of 2023, we lost contact with ET3 and our continuing efforts to re-establish communication. Regardless of the outcome, our LEO constellation satellites will substitute for ET3 in 2024, well in advance of the ITU required deadline in 2026. We have also been working to expand our LoRaWAN activities. LoRa, for long-range, is a low-power, wide-area device connectivity for the Internet of Things. Last year, we initiated hybrid S-band satellite and terrestrial LoRa services over the ECOSTAR21 satellite in Europe to create the first pan-European LoRa-enabled network. During the fourth quarter, we completed an initial commercial deployment of our hybrid S-band satellite and terrestrial LoRa services in Mexico, and we are currently testing similar services in the US. These activities will be supported shortly thereafter with our new LEO constellation. It is going to be a very exciting time for the LoRa and satellite IoT ecosystem as we aggressively drive satellite IoT capabilities forward globally. our 5G NTN activities, the LEO constellation will serve as a foundation for engineering 5G narrowband NTN-based capabilities, building on 3GPP Release 17 and beyond. We remain engaged with 5G NTN ecosystem partners at all levels of the value chain in support of our goal of engineering a truly transformative wideband LEO-based 5G NTN capability. For Horizon 3, in addition to our S-band activities, we are actively evaluating other opportunities for new avenues of organic and inorganic growth. We will share more details as all these efforts and plans solidify. Let me now turn it over to the operator to start the Q&A session.

As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from Rick Prentice with Raymond James. Your line is now open.

Thanks. Good morning. Good afternoon, everyone. Hi, Rick. Hey, a couple questions. First, let's start with Jupiter 3. Glad to see the timing firming up here. That's in the final stages. Can you help us understand, have you got a launch date yet? And when do you think we should assume Jupiter 3 can go in service?

Yes, well, Rick, we have made arrangements for launching You know, we're not announcing the date at this time, but we have a launch set up on the SpaceX Falcon Heavy. And so with that, we were expecting Q3 to bring our services into market. The system we have is already been deployed in the United States, is ready to go. And the actual technology has been deployed in several customers already. So we're very certain of of our ability to rapidly deploy the network once we get the satellite.

Great. Similar question that I asked to one of your peers out there, how fast they think they would fill up their next generation satellite that they're launching. How fast do you think you'll be able to fill this bird up? I think it probably is what implies the difference between Horizon 2 and Horizon 3. And then when we think about capacity, I think you have about 1.3 million subs today. How should we think about what that added capacity of two to three could be in relative terms.

Okay, well, as far as the fill time, you know, we're estimating about two to three years, which would be typical of what we've seen in the past. You know, we expect similar sorts of consumption capacity. As far as the actual self numbers, I don't think we're prepared to give you a specific number. I think understand our plan with the capacity is to optimize our yield. It really goes in two dimensions. Growing subscribers, of course, is one dimension. But the other dimension, of course, is our food. As we improve these plans and improve the capabilities for the customers, we've seen in the past that the customers are willing to pay more. So we would expect overall revenue, which is our key objective here, and our yield from that capacity to be our main focus.

Okay. And then shifting gears to the LEO project that you talked about, how did you come up with Y28 satellites in this constellation? How should investors think about what the capital commitment is over how many years to launch this LEO project?

Rick, the system was designed based on the original filing of our Syrian-1 application and rights. And so this design was already developed in the registration, in the filing, and we're just completing that. But it does provide a complete coverage of the globe, even with several visitations per day, even in partial deployment, even from its very first start or first launch. It's launched in batches, and the very first one actually does provide complete coverage of the globe. And as the additional satellites come on and, you know, that visitation rate increases, we think is perfectly adequate and capable for, you know, a wide range of IoT services and anything NORAD related and beyond. In terms of a cost structure, you know, this is a, you know, second generation system for us and, you know, is a stepping stone towards our you know, main goal and ambition to build a, you know, the leading wide band, perhaps the only wide band 5G and TN system to follow, which we have been working on. So you should assume that this is a, you know, incremental capital expenditure, but certainly not at the level that would prevent us from being able to, you know, materialize our larger system.

I know... We have speculated maybe this 28 LEO satellite project could be something done for $100 to $200 million total. Is that within the realm of reasonable, or am I low there, high there?

I mean, it would be not too far from the ballpark. I think that those numbers are close to where our head is and our plan is.

Okay. It's good to be in the ballpark. And then the final question for me, obviously you mentioned that The 28 Leo satellite is a stepping stone. It's generation two, but not the ultimate wideband one. Maybe give us a few of your thoughts, and it came up briefly on the dish call earlier today that's been a busy earnings day, about directed device. How do you view directed device market, the satellite communications with smartphone linkage? That market seems ripe. but also seems early and somewhat confusing to investors out there. Can you walk us through a little bit about how you see direct-to-device opportunities?

First of all, we believe that direct-to-device is a fundamental opportunity. It's a very large opportunity, and I think it's a game-changing opportunity. But we also believe that the very first initial steps of messaging only in a variety of qualities and capabilities is the initial step that is the, you know, that's probably the smallest step, not fully activating all the capabilities which we think are exciting. A true wideband system which will have a natural use of your smartphone, similar to what you would use on a, you know, terrestrial network is what our ambitions are, and I think that's where the game-changing capability will come. That is still possible. you know, a few years away, but it's something that we are working on, and we believe that, you know, there's not room for too many of those out there, and certainly we hope to be, expect to be the leading provider of that capability. But in the interim, obviously, there will be, you know, a messaging-based service, a direct-to-device, and we are able to demonstrate it and work that today in some of our systems, and I think we'll see some of those commercial offerings in the market in the near future.

Great. Thanks very much. It was so well.

Please stand by for our next question. Our next question comes from Chris Quilty with Quilty Analytics. Your line is now open.

Thank you, and congrats on finally moving forward with the SBAN constellation. Now that it's out there, I got more detailed questions and maybe just start with a couple of technical things in terms of what orbit you intend to use and will this system have cross-links? And when you think about the, you know, there's existing competition out there. There's a lot of companies adding IoT constellations. Where do you see this fitting in terms of its capability? Obviously, it's distinct in that it's a LoRa-based communications layer and what eventually led you to that path versus another protocol?

Right. So there's several questions in there, Chris, and I'll try to parse them. First of all, we have had quite a bit of experience with LoRa. We have been providing LoRa service over Europe for quite some time now. Now we are able to provide commercial service in Mexico. We are experimenting with LoRa. over the United States. We believe that just a narrowband IoT market in itself, by end of this decade, will be more than $10 billion annually. So there's quite a bit of room, and this is not even all the different applications and use cases that have been identified. So I think that in itself is a very large market and has room for multiple operators to be there. And as I mentioned, You know the way we the capabilities of our system are specified in our filing in that we have made for Syrian one. So some of those you can actually find in public domain. We've not disclosed anything more than what's in public domain regarding the capabilities of that system, and now that's that's primarily for competitive reasons. We like to have that more guarded at this point, but we think the system is quite capable of providing a. superior IoT services. Now, having said that, we again consider this one a significant step towards taking full advantage of our S-band spectrum capabilities, and that requires building a much more capable system. With this step, we'll gain a tremendous amount of knowledge about the performance of the 5G NTN. Remember that this standard was just recently finalized. There's not been many or any system out there that has ever used it. We are an engineering company with deep, deep heritage and understanding of satellite systems and engineering links and capabilities. We want to make sure that we have a system that we can absolutely perfect our understanding of the standards and remove any sort of limitations or bugs that may be there So to ensure that the big system that we are working on will ultimately be, you know, fully effective and maximally, you know, proficient. So that's the way we think about it. And we fully understand that others are also working on IoT. I think the market is large enough for all of that. But also, as I said, we are looking to step beyond that and go to a wide band system.

Gotcha. And how do you intend to go to market? Direct, wholesale, partnerships?

Look, we're exploring all of those. At this point, we're not really giving any more specifics today. We are working in partnerships in the markets that I mentioned. But clearly, you know, for a larger system with, you know, different geographies, you know, it is our intention to maximize our access to market through multiple routes, so you will see us probably take different approaches in different markets, but certainly access to market has not been a limitation for us, and demand has been robust in terms of partnership and wanting to sell the services.

Gotcha. And just one question on the existing service. With the new Fusion product, Is that a service that you'll offer even as Jupiter 3 comes out in the future and obviously has a lot more capability? Does fusion still become necessary, or is fusion a way for you to actually expand your addressable market? Because you can basically reserve some satellite capacity to use a little fusion. And then the second question is if, in fact, fusion becomes a much bigger part of the mix on a go-forward basis, does it in any way?

impact uh you know the overall margin profile since you're reselling somebody else's service well okay so on the first question um you know we see fusion as a key new technology that augments what we already do today um and if you look at our customer set there's a lot of customers uh that the standard geo services are a good fit and we think that's a predominant number of them as most of them their applications have have drifted over towards primarily streaming video and video applications. So we see that high-speed capability that, say, a Jupiter III would provide as primary support. But if you look at the fusion, customers that have latent-sensitivity applications, we see that as really the answer that allows them to get the benefits of both the geo and the low-latency terrestrial. What happens, I think, primarily for customers is that as we look at rolling this out further, we expect to get a fair amount of our market coverage there. And so we think it'll really be a good premium service for customers.

Great. And any material margin impact?

Well, that remains to be seen a little bit on the percentages. You know, obviously, as we're buying capacity, from other players, that is a lower margin than our own assets. But at the same time, there's limited capital investment we make to get that. So that might tend to balance out.

If I may add also to that, we're expecting a significant churn improvement, and we have seen it already from the Fusion product. So while the fusioner product may, on its bill of material, you know, cost and gross margin, not provide as much margin as you would get from using our own product, we see a significant improvement on churn, which compensates for that margin drop. So net-net, we think, is an incredible product, and we have received fantastic receptiveness from the marketplace so far.

Great. Great quarter. Let us know when you've got a launch date.

Absolutely will. We are anxiously waiting ourselves, and I think we're making great progress there, inching forward every day. And listen, we have had a great year, thanks to Paul and the team. We have had a great year in a market that we were underhanded simply because of a lack of capacity and a brand-new system shows up with no traffic on it. And for the first time ever, the satellite industry introduces the term unlimited, although it's no longer unlimited. Now, that limitation has been placed, and the prices have been raised, and capacities have been used. But during the year that we had the maximum headwind, I think we delivered a growth here, both on revenue and EBDA. And I think we are excited about when Jupiter 3 shows up. how we can, you know, much more effectively compete.

Okay. Sounds good. Thank you.

Please stand by for our next question.

Our next question comes from Michael Rollins with Citi.

Your line is now open.

Thanks. Just a couple questions. First, I'm curious, as you're greenlining some of these projects and looking at other projects to leverage your assets and capabilities, what are the average payback periods that you're targeting for those investments, including the constellation for the S-band that you were describing earlier? And then the second question is just a capital allocation question. these different investment opportunities now in front of you, should investors expect a deliberate change in capital allocation and pausing the buyback activity to just provide more financial flexibility over the next 12 to 24 months as you're thinking about these different options? Thanks.

Right. Several comments and some questions. Well, the simple one to answer is we believe – the investments we are about to make and we are making are accretive and improve our financial position in terms of margins and returns and over the horizons that typically are associated with capital investments in this industry. This industry, obviously, the capital investments are made a few years in advance and there's no way to change that. However, we believe The margins associated in our models with any new investments would be at least as good as what we have historically done and potentially significantly better. Otherwise, we wouldn't be going there. And second is related to our share buyback. we stopped the share buyback because we believe we are able to, in the longer term, we are able to generate significantly additional performance and gains beyond buying our own shares. And we do have use cases for our capital and we'll have demands on our capital that we think would serve the shareholders best. That's why we stopped the share buyback, even though we absolutely believe that our share price is grossly undervalued. We think we still are better off and our shareholders are better off allowing us to use that capital to develop the business and put the business in a much faster growth trajectory.

Thank you.

Please stand by for our next question. Our next question comes from Rick Prentice with Raymond James.

Your line is now open.

Thanks. Hey, I have a few follow-up questions. I could continue along the S-band line here. In the 10-K, it talked about you have the S-band terrestrial as well as satellite authorizations in Europe, Mexico, and Chile. And in the process for applying and receiving additional authorizations, How should you think about what other regions of the world S-band might be of benefit to you? And who do you see as the most significant other operators or other companies that have S-band out there?

Hi, Rick. It's Dean.

So in terms of regions of the world, you know, we're really – focusing on that from a commercial perspective, which are the regions that are going to be the most central to the most customers at the earliest stages of the project. And so we have a worldwide approach to market access, and we're well underway with that. It's bolstered significantly by the top priority position that we enjoy at the ITU level with the Sirion 1 filing. So that's the cornerstone of the effort. And market access will, to a large degree, follow the deployment of this new system, the 3-on-1 system. If we have satellites to actually land traffic in jurisdictions, we'll find that we'll get more and more market access there. I think in terms of competition, it'll probably vary from one region to the next. But we feel like with our technology and with the rights that we have through the IDU, we're very well positioned to be the leader.

And within the U.S. specifically, I think sister company Dish has some AWS spectrum that has a similar band. Where are your rights as far as being able to do something in the U.S. with your experience?

Yeah, we're not at a point right now where we're making announcements or public statements on that, but there are multiple directions that we can go with that.

And I think you also mentioned that enterprise has continued to grow as a percent of the revenues at Hughes, I believe it was about 22% in this recent quarter. How should we think about where enterprise goes over time as far as a mix?

Yeah, Rick, well, if you look at it, I think the last

Here and as we look forward next year or two, we see the enterprise business continuing to grow. And of course, you know, we've had the consumer business, you know, waiting for our new Jupiter 3 satellite system. So that mix probably a little hard to project going forward because we expect to see both segments grow going forward. So I think can't give you a specific number on that.

Okay. And obviously, enterprise has grown as consumers have been under pressure. A consumer can grow. So there's no set kind of goal of trying to get consumer and enterprise to a 60-40, 70-30, 50-50 kind of mix. There's no set kind of target from that standpoint.

No, not at this point, no.

And one just mundane question. On the corporate side and the financials, the corporate costs of overhead came in a little higher than we were anticipating, but I think we had some requirements out there about what the right level of corporate overhead is as you have dues and dues growing and ESS maybe getting larger too over time. Are you at the right level? Is this the level of this quarter that we should think about? Or is the annual level right? Or how should we think about run rating corporate overheads?

Yeah, Rick. Rick, this is Terry. Yeah, we did see a little uptick there. And just to remind you, I mean, in addition to the corporate expenses, that does include a lot of our corporate development activities, you know, associated with the new projects we're doing around S-band. You know, so there was, you know, some generally increases in there, but also seeing a little bit of activity associated with our new project. You know, I think that level that we're at is obviously we'll do, we do everything we can to keep that at the levels we're at. But, you know, that's, I think that's an okay, you know, run rate going forward here into the near future.

But, Rick, let me just add from my own business philosophy perspective, we're not adding management overhead. If that's what your concern is, you know, these are maybe shown up at a corporate level but it's not adding additional management. In fact, if anything, since I joined the business, we have significantly streamlined our management and reporting lines in order to make sure we have more of a flat organization as evidenced by the fact that we have here, we have Paul representing the entire globe's front side of the house and so forth. There is some numbers there, but definitely they're not corporate overhead as we traditionally refer to them.

Gotcha. And then final one for me to wrap it up. The ESS business, which is albeit very small, did see a noticeable uptick in EBITDA. We had been thinking there might be some fall-off at some point in the ESS business. How should we think about what's in the ESS line items and what the trend lines are for that small kind of residual segment.

Yeah, Rick Terry here. So, yeah, we've seen a real nice uptick, you know, into that business. You know, it's still the business is primarily, you know, third-party leasing on the 105 and Echo 9 satellites. So made a lot of progress there in terms of selling additional capacity there. uh here you know towards the end of 2022 um so look i think you know we're the plan is to keep it at those you know levels hopefully increase it um you know continue to increase it a bit here as we go into 2023 um you know just yeah so um look i think we're we're a pretty good level uh that we're uh that we saw in q4 okay very good look forward to seeing you all soon and take care have a good day

Thanks Rick.

Please stand by for our next question.

Our next question comes from Chris Quilty with Quilty Analytics.

Your line is now open.

Okay, Terry, since you brought up the segment reporting, I got to say I was hoping that with the 10K we might get some better segment reporting than how it's broken down today. But I guess given that Dave just left, there's probably a pretty heavy lift without a new CFO. But when we think about the business going forward, when we take something like the S-band constellation getting on orbit, is that all in the ESS or – If you're building equipment for it in the Hughes segment that's sold out through the ESF segment, I mean, is there a way that we can think about the business on a go-forward basis of how you're going to organize it into enterprise versus consumer or some other structure? Because the current structure, I mean, there's a lot buried within the Hughes segment in terms of other business lines that we really can't see. and would love to get a little bit more visibility on that, which I think would help with investors and your valuation.

Chris, we understand that. We appreciate your point of view, and we agree with it. We have a business that is in transition. Both you have seen, first of all, the growth of our enterprise business. You have heard about our aspirations and goals to make a significant business out of our S-band and enter new era of growth through that. And we're also looking at M&A through other arms of our enterprise business unrelated to the S-band. I think 2023 will be a year of I guess, transition for us as we kind of move forward with this Horizon 2 and Horizon 3 and Horizon 1, which is an optimization of what we have had. As you have seen, we've done a good job in keeping the show running, but Horizon 2 and 3, which we are working on in 2023, kind of shaped the business going forward in a significantly different way, we expect. And as a result of that, it would be imprudent for us to go ahead and introduce additional segment details just to come and change them nine months later. I think you would want us to get our act together, be more definitive with what we are planning to do and how we're progressing, and then provide additional detail. We do intend to do that. It'll just take us some time to get it right. And yes, not having a CFO perhaps something to do with it, but I don't really honestly think that is the driver. I think the driver is that even with a CFO, our business is changing. We need to know What is relevant? How much of our attention is going to be focused on what? And we have multiple avenues of growth and development, and we are focused on all of them. And we'll find out this year which ones are most applicable for the investors, and we do intend to make additional disclosures of that information.

I'll hold you to it. I heard 2024 new segment reporting. So a second question. Did you give any guidance that I missed around CapEx for this year? Obviously, you've got the Jupiter 3 program tailing off. There is no new satellite program in the bucket. And I think on their call last week, you know, Viasat said they expect their CPE-related CapEx to be up, you know, threefold once the satellite launches. Is that a you know, reasonable assumption that you're going to be shipping so many damn terminals that, you know, the CPE, or sorry, the CapEx isn't going to really see a fall off in 23?

You know, I think you should expect our CapEx to be similar to what you have seen, and you should not expect us to be vastly different. And that's because a combination of offsetting effects, you know, we, some of the CapEx that we typically had had to pay for Jupiter 3, we won't have to pay. That satellite, much of that CapEx has been paid for. But on the other hand, you'll see us acquire additional customers, significantly additional customers, eating up some of that CapEx savings. So all in all, we're not expecting a disruptive step function change in our CapEx on an annual basis. I mean, don't hold me to every dollar of that, but we're not seeing... In no way we are stating that our CapEx is going to have an impressive jump of any kind.

Gotcha. And where does the ground segment sit today? I think, are you building, what is it, like eight gateways and there are QV bands and the new technology? Have you been able to do any testing on that? Yeah.

Chris, we've touched on them. Over 18 sites installed. There's a number of different combinations of locations in our network because we have a cloud architecture. Except for two sites, they're all completely installed. And we've been able to test some of these sites on an existing capacity we have on Echo 9. So we have pretty far along in all of that process. We're very sure of the actual technology, as I mentioned earlier, We've actually deployed it in this configuration for two other customers. So we have a lot of operating experience on it as well.

Now, wait a second. When was Echo 9 launched? You actually had QV band on Echo 9?

No, we had KA. The QV, we've not been able to test in that fashion, but we got good laboratory testing of that. So we're pretty sure how that will operate as well.

Gotcha. And a question that Rick asked about the enterprise and consumer mix brought up a question, which is, if I just think about Jupiter 3 as a platform, is the emphasis going to be able to reserve more of that capacity for enterprise customers? And do you think of enterprise in things like IFC? Or when I look at North America with SES 17 and Viasat 3, you know, that's a market where you'll continue to serve it from a distance?

Well, I think two things. One, for Jupiter 3, in Latin America, South America, we're optimizing the capacity for yield. So there we expect to continue to add additional enterprise, significant additional enterprise business. So the blend of the consumer versus enterprise will vary over time depending on where we think our best yield is. In North America, we still anticipate having applications for our capacity in the enterprise space, so it won't be just consumer, but we're still working on those opportunities. I have nothing at this point to relay.

All right, that's it for me. Thanks, guys.

Thanks, Chris.

At this time, I show no further questions. I would now like to turn the conference back to Terry Brown for closing remarks.

Yeah, we'd just like to thank everybody for joining today and looking forward to talking to you again soon. Thank you.

This concludes today's conference call. Thank you for participating.

You may now disconnect. Music. Thank you. Thank you. Thank you.

Good day and thank you for standing by. Welcome to the Echo Star Corporation conference call for fourth quarter 2022 results. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Terry Brown. Please go ahead.

Thank you. Good day, everybody, and welcome to our earnings call for the fourth quarter of 2022. I'm joined today by Hamid Akhavan, our CEO and president. Paul Gaske, our Chief Operating Officer, Dean Manson, our Chief Legal Officer, and Jeffrey Boggs, our Interim Chief Accounting Officer. As usual, we invite media to participate in a listen-only mode on the call and ask that you not identify participants or their firms in your report. We also do not allow audio recording, which we ask that you respect. Let me now turn the call over to Dean for the safe harbor disclosure.

Thank you, Terry. All statements we make during this call, other than statements of historical fact, constitute forward-looking statements made pursuant to the safe harbor provided by the Private Securities Litigation Reform Act of 1995. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that could cause our actual results to be materially different from historical results and from any future results expressed or implied by the forward-looking statements. For a list of those factors and risks, please refer to our annual report on Form 10-K for the year ended December 31, 2022, filed yesterday with the SEC. All cautionary statements we make during the call should be understood as being applicable to any forward-looking statements we make wherever they appear. You should carefully consider the risks described in our reports and should not place any undue reliance on any forward-looking statements. We assume no responsibility for updating any forward-looking statements. We referred to adjusted EBITDA during this call. The comparable GAAP measure and reconciliation thereto are presented in our earnings release. I'll now turn the call over to Hamid.

Thank you, Dean, and good day, everyone. We have had an exciting fourth quarter. In December 2022, Pratt & Cole announced his retirement, and we would like to thank him for his 50 years of service. This announcement signaled the start of a new era as we aligned the company for success in a changing industry. As of January 1, 2023, Paul Gaske assumed the new Chief Operating Officer role that was established to lead all market-facing global activities. Congratulations to you, Paul. We remain enthusiastic about our future and believe that under a more streamlined management and operating structure, we will drive efficiencies synergies, and greater growth. We continue our search for a chief financial officer and will keep you informed of our progress. As for our agenda for the call today, first, we will provide a brief overview of financial activities from the fourth quarter. After that, we'll discuss our business strategy, which includes the three parallel work streams that I call horizons, and our progress on all three. We'll then move to question and answer sessions. Let's start with our financials. Our revenue in the quarter on the fourth quarter of 2022 was $500 million, up slightly compared to the same period of prior year. On a full year basis, we achieved $12 million of growth. This in spite of the fact that for the full year of 2022, we faced competition from Starlink, which brought significant capacity to the market, we did not have access to the benefits of our upcoming jupiter 3 system the revenue increase in the fourth quarter was primarily the result of growth in our enterprise business while our consumer broadband business has been impacted by capacity constraints and other factors we have continued to increase revenue by capitalizing on enterprise and government opportunities both domestically and internationally this is consistent with my statements in prior earnings calls regarding our continued focus on diversification of the business. Our adjusted EBITDA in the fourth quarter was $164 million, an increase of 3% from last year, primarily driven by lower sales and marketing expense associated with our consumer broadband business. We continue to focus on managing our costs in line with the change in revenue mix to preserve our ability to generate cash. In the fourth quarter, we saw continued momentum in our enterprise business with $195 million of new orders. Our 2022 orders increased 41% compared to the same period last year. Most enterprise orders are recognized over several years, creating a long and a stable revenue stream. We remain excited about opportunities within the enterprise market, the market that we believe will continue to allow us to better diversify our business, both domestically and internationally, and provide cash generation through low capital investment and a scalable operating leverage. Capital expenditures in a quarter were $77 million compared to $86 million in Q4 of last year. The decrease was primarily due to lower spend on Jupiter-3 satellite program and consumer premise equipment. Free cash flow defined as adjusted EBITDA minus CapEx, was $87 million during the quarter and $330 million in 2022. We ended the quarter with $1.7 billion of cash and marketable securities. This is post-purchasing approximately $90 million of our own stock in 2022. I remain excited about the strength of our balance sheet. as it affords us the flexibility to explore investment opportunities that could foster growth, which remains a key component of our business strategy. Let me now turn the call over to Paul, who will provide some additional specifics on the quarter and our Horizon 1 and 2 activities.

Thank you, Hamid. As a reminder, Horizon 1 is our year-term priority to maximize current services and operations, while managing costs as we prepare for the launch of the Jupiter III ECHOSTAR 24 satellite. To that end, we continue to focus on operational efficiencies and yield optimization of our North America satellite capacity. In 2022, we restructured our portfolio of consumer service offerings to better align with market demand by provisioning additional capacity for our customers. We plan to continue to optimize our service plans in 2023 as we await the launch of the Jupiter 3 service. The changes in our service plans have resulted in a natural shift towards higher capacity, higher price plans for our customers, improving our ARHUs while delivering an enhanced customer experience. Additionally, we remain focused on improving our cost structure through deployment of additional automation, improved processes, and supply efficiencies, of course, without compromising the end user experience. In the third quarter of 2022, we launched HughesNet Fusion, adding support for latency-sensitive applications to the traditional HughesNet satellite service, which is optimized to support high-speed applications like video and downloads. HughesNet Fusion utilizes a unique data handling software to seamlessly combine our satellite service with the terrestrial wireless service, providing an exceptional internet experience that is responsive, reliable, and fast. The HughesNet service plans, the HughesNet Fusion plans, have been well received by existing and new subscribers, and we expect the service to help attract new customers and reduce churn while improving articles. Although we continue to see competitive pressures within the underserved market we address, we believe the combination of our optimized service plans and HughesNet Fusion service should help combat competition. Moving to our North America enterprise business, in the fourth quarter, we signed a $9 million managed service contract with a new customer to utilize our secure broadband connectivity. We also received extensions from three retailers valued at approximately $5 million each and continue to see success with contracts and deployments in the retail petroleum and energy markets. In our OneWeb program, deliveries of production gateways continued as planned. As of the end of 2022, we have shipped 32 gateways and expect to complete the total complement of 44 gateways in 2023, in line with our committed schedule and customer expectations. Additionally, we have shipped more than 12,000 satellite subscriber modules for inclusion in OneWeb terminals. We also executed a contract to deliver 7 by 24 operational support for the OneWeb network that includes development of advanced AI management capabilities for the OneWeb ground infrastructure. Our government business ended the year with record revenues. Although the business is still a relatively small scale, it has been growing through the development of network and security management tools for DOD applications and evolving technologies such as terrestrial and 5G NTN networks. As part of our streamlined management structure, we merged our defense and civil government business groups into one cohesive unit to drive efficiencies and expand opportunities for growth in the future. Now to our international operations, we continue to allocate additional capacity to address a wide range of enterprise applications to close the digital divide. In Mexico, we added broadband and sailor backhaul locations for CFE telecom, as well as connectivity services to a major bank. In Colombia, we increased bandwidth to the 670 Antequia schools. In Brazil, we expanded the scope of our services agreement with a major telecommunications provider, to deliver internet and approximately 1,600 rural schools. With regards to our HughesNet service in Latin America, we remain focused on adding high-value subscribers, which is lower in churn, while optimizing yield on our existing Latin American capacity to increase profitability and cash generation. In terms of the Jupiter equipment sales, Jupiter system equipment sales, we had significant orders from around the world. In Mexico, a major oil producer ordered an upgrade for their existing use system and signed a multi-year support agreement. In Africa, a leading telecommunications service provider upgraded their Jupiter system to support network expansion and LTE backhaul connectivity. We also received a sizable order for BGAN terminals to support machine-to-machine communications. In the Middle East, a telecommunications service provider ordered an additional redundant Jupiter gateway to enhance their service offerings. Now let me focus on Horizon 2 activities. These include our efforts to bring Jupiter 3 into service for expansion of our service in North and South America, as well as growing and diversifying our global enterprise offerings. I'm pleased to report that the Jupiter 3 satellite is in the final stages of assembly and launch, which is expected to occur in the second quarter of 2023. As many of you know, in November 2022, we entered into an amended agreement with Maxar. the manufacturer of the satellite, to secure compensation for past delays and to realign remedies to incentivize Maxar to complete the program expeditiously. The compensation provides for relief on approximately $14 million of payments through in-orbit raising and more than $44.5 million plus interest on deferred in-orbit incentive payments. The amendment requires Maxar to pay liquidated damages in the event of further delays. Also, Maxar agreed to enter into an agreement with us where we will provide certain products or services to Maxar during 2023 for payments that will deliver us a margin of at least $30 million. In preparation for the launch of Jupiter 3, the team is focused on developing service plans with higher speeds, more data capacity, and the extension of our HughesNet fusion plan for the ultimate high-speed, low-latency satellite internet experience. We believe the market is eager for these robust offerings, and we plan to have a highly competitive suite of services to meet a variety of our customers' needs once Jupiter 3 enters service. Horizon 2 also has a strong focus on our global enterprise business that includes the government sector. We plan to leverage our business connectivity, managed services portfolio, our hybrid V-O-G-O business solutions, and our own manufactured products to pursue growth. Increased participation in this vast market segment is a key element of our diversification strategy, which includes improving our operational scale with potential small acquisitions, which we will continue to explore. Now let me turn the call back over to Hamid.

Thank you, Paul. I would like to provide an update on Horizon 3, which is our strategy to expand into new markets around the world through both organic innovation as well as potential acquisitions. One significant area of progress is around our S-band opportunities. You probably saw a recent press release announcing our agreement with Astro Digital to begin construction of a global S-band mobile satellite service network. The 28 satellite LEO constellation is primarily targeting IoT services, which we believe is a vast untapped opportunity. The constellation will provide a commercial service that will provide us with a platform for ongoing market development and is a measured next step in terms of building our SBAN license portfolio. Some of you may recall that in the second quarter of 2021, we launched our third nanosatellite, known as EG3, with a primary mission to bring into use our Syrian-1 ITU filing. This mission was successfully completed in the third quarter of 2021, The satellite provided us with the ability to test a wide range of potential S-band applications and services, which we used in the design phase of our LEO constellation. During the first quarter of 2023, we lost contact with ET3 and our continuing efforts to re-establish communication. Regardless of the outcome, our LEO constellation satellites will substitute for ET3 in 2024, well in advance of the ITU required deadline in 2026. We have also been working to expand our LoRaWAN activities. LoRa, for long-range, is a low-powered, wide-area device connectivity for the Internet of Things. Last year, we initiated hybrid S-band satellite and terrestrial LoRa services over the ECOSTAR21 satellite in Europe to create the first pan-European LoRa-enabled network. During the fourth quarter, we completed an initial commercial deployment of our hybrid S-band satellite and terrestrial LoRa services in Mexico, and we are currently testing similar services in the U.S. These activities will be supported shortly thereafter with our new LEO constellation. It is going to be a very exciting time for the LoRa and satellite IoT ecosystem as we aggressively drive satellite IoT capabilities forward globally. our 5G NTN activities, the LEO constellation will serve as a foundation for engineering 5G narrowband NTN-based capabilities, building on 3GPP Release 17 and beyond. We remain engaged with 5G NTN ecosystem partners at all levels of the value chain in support of our goal of engineering a truly transformative wideband LEO-based 5G NTN capability. For Horizon 3, in addition to our S-band activities, we are actively evaluating other opportunities for new avenues of organic and inorganic growth. We will share more details as all these efforts and plans solidify. Let me now turn it over to the operator to start the Q&A session.

As a reminder, to ask a question, please press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from Rick Prentice with Raymond James. Your line is now open.

Thanks. Good morning. Good afternoon, everyone. Hi, Rick.

Hi, Rick.

Hey, a couple questions. First, let's start with Jupiter 3. Glad to see the timing firming up here, that's in the final stages. Can you help us understand, have you got a launch date yet, and when do you think we should assume Jupiter 3 can go in service?

Yes, well, Rick, yeah, we have made arrangements for launching. You know, we're not announcing the date at this time, but we have a launch set up on the SpaceX, Falcon Heavy. And so with that, we were expecting Q3 to bring our services into market. The system we have is already being deployed in the United States. It's ready to go. And the actual technology has been deployed in several customers already. So we're very certain of our ability to rapidly deploy the network once we get the satellites.

Great. Similar question that I asked to one of your peers out there, how fast they think they would fill up their next generation satellite that they're launching. How fast do you think you'll be able to fill this bird up? I think it probably is what implies the difference between Horizon 2 and Horizon 3. And then when we think about capacity, I think we have about 1.3 million subs today. How should we think about what that added capacity of Jupiter 3 could be in relative terms?

OK, well, as far as the fill time, we're estimating about two to three years, which would be typical of what we've seen in the past. We expect similar sorts of consumption capacity. As far as the actual self numbers, I don't think we're prepared to give you a specific number. I think understand our plan with the capacity is to optimize our yield. So it really goes in two dimensions, growing subscribers, of course. is one dimension, but the other dimension, of course, is ARPU. As we improve these plans and improve the capabilities for the customers, you know, we've seen in the past that the customers are willing to pay more, so we would expect overall revenue, which is our key objective here, and our yield from that capacity to be our main focus.

Okay. And then shifting gears to the LEO project that you talked about, how did you come up with Y28 satellites in this constellation? How should investors think about what the capital commitment is over how many years to launch this LEO project?

Rick, the system was designed based on the original filing of our Syrian-1 application and rights. And so this design was already developed in the registration, in the filing, and we're just completing that. But it does provide a complete coverage of the globe, even with several visitations per day, even in partial deployment, even from its very first start or first launch. It's launched in batches, and the very first one actually does provide complete coverage of the globe. And as the additional satellites come on and, you know, that visitation rate increases, we think is perfectly adequate and capable for, you know, a wide range of IoT services and anything related and beyond. In terms of a cost structure, you know, this is a, you know, second generation system for us and, you know, is a stepping stone towards our you know, main goal and ambition to build a, you know, the leading wide band, perhaps the only wide band 5G and TN system to follow, which we have been working on. So you should assume that this is a, you know, incremental capital expenditure, but certainly not at the level that would prevent us from being able to, you know, materialize our larger system.

I know... We have speculated maybe this 28 LEO satellite project could be something done for $100 to $200 million total. Is that within the realm of reasonable, or am I low there, high there?

I mean, it would be not too far from the ballpark. I think that those numbers are close to where our head is and our plan is.

Okay. It's good to be in the ballpark. And then the final question for me, obviously you mentioned that The 28 Leo satellite is a stepping stone. It's Generation 2, but not the ultimate wideband one. Maybe give us a few of your thoughts, and it came up briefly on the dish call earlier today that's been a busy earnings day, about directed device. How do you view directed device market, the satellite communications with smartphone linkage? That market seems ripe. but also seems early and somewhat confusing to investors out there. Can you walk us through a little bit about how you see direct-to-device opportunities?

First of all, we believe that direct-to-device is a fundamental opportunity. It's a very large opportunity, and I think it's a game-changing opportunity. But we also believe that the very first initial steps of messaging only in a variety of qualities and capabilities is the initial step that is the, you know, that's probably the smallest step, not fully activating all the capabilities which we think are exciting. A true wideband system which will have a natural use of your smartphone, similar to what you would use on a, you know, terrestrial network is what our ambitions are, and I think that's where the game-changing capability will come. That is still possible. you know, a few years away, but it's something that we are working on, and we believe that, you know, there's not room for too many of those out there, and certainly we hope to be, expect to be the leading provider of that capability. But in the interim, obviously, there will be, you know, a messaging-based service, a direct-to-device, and we are able to demonstrate it and work that today in some of our systems, and I think we'll see some of those commercial offerings in the market in the near future.

Great. Thanks very much. It was so well.

Please stand by for our next question. Our next question comes from Chris Quilty with Quilty Analytics. Your line is now open.

Thank you, and congrats on finally moving forward with the SBAN constellation. Now that it's out there, I got more detailed questions and maybe just start with a couple of technical things in terms of what orbit you intend to use and will this system have cross-links? And when you think about the, you know, there's existing competition out there, there's a lot of companies adding IoT constellations. Where do you see this fitting in terms of its capability? Obviously, it's distinct in that it's a LoRa-based communications layer and what eventually led you to that path versus another protocol?

Right. So there's several questions in there, Chris, and I'll try to parse them. First of all, we have had quite a bit of experience with LoRa. We have been providing LoRa service over Europe for quite some time now. Now we are able to provide commercial service in Mexico. We are experimenting with LoRa. over the United States. We believe that just a narrowband IoT market in itself, by end of this decade, will be more than $10 billion annually. So there's quite a bit of room, and this is not even all the different applications and use cases that have been identified. So I think that in itself is a very large market and has room for multiple operators to be there. And as I mentioned, you know, the way we, the capabilities of our system are specified in our filing in, that we have made for Syrian one. So some of those you can actually find in public domain. We've not disclosed anything more than what's in public domain regarding the capabilities of that system. And no, that's for, that's primarily for, you know, competitive reasons. We like to have that, you know, more guarded at this point. But we think the system is quite capable of providing a, superior IoT services. Now, having said that, we again consider this one a significant step towards taking full advantage of our S-band spectrum capabilities, and that requires building a much more capable system. And with this step, we'll gain a tremendous amount of knowledge about the performance of the 5G NTN. Remember that this standard was just recently finalized. There's not been many or any system out there that has ever used it. We are an engineering company with deep, deep heritage and understanding of satellite systems and engineering links and capabilities. We want to make sure that we have a system that we can absolutely perfect our understanding of the standards and remove any sort of limitations or bugs that may be there So to ensure that the big system that we are working on will ultimately be, you know, fully effective and maximally, you know, proficient. So that's the way we think about it. And we fully understand that others are also working on IoT. I think the market is large enough for all of that. But also, as I said, we are looking to step beyond that and go to a wide band system.

Gotcha. And how do you intend to go to market? Direct, wholesale, partnerships?

Look, we're exploring all of those. At this point, we're not really giving any more specifics today. We are working in partnerships in the markets that I mentioned. But clearly, for a larger system with different geographies, it is our intention to maximize our access to market through multiple routes, so you will see us probably take different approaches in different markets, but certainly access to market has not been a limitation for us, and demand has been robust in terms of partnership and wanting to sell the services.

Gotcha. And just one question on the existing service. With the new Fusion product, Is that a service that you'll offer even as Jupiter 3 comes out in the future and obviously has a lot more capability? Does fusion still become necessary, or is fusion a way for you to actually expand your addressable market? Because you can basically reserve some satellite capacity, use a little fusion. And then the second question is if, in fact, fusion becomes a much bigger part of the mix on a go-forward basis, does it in any way? impact the overall margin profile since you're reselling somebody else's service?

Well, okay, so on the first question, you know, we see Fusion as a key new technology and service that augments what we already do today. And if you look at our customer set, there's a lot of customers that the standard geoservices are a good fit, and we think that's a predominant number of them, as most of them, their applications have have drifted over towards primarily streaming video and video applications. So we see that high-speed capability that, say, a Jupiter III would provide as primary support. But if you look at the fusion, customers that have latent-sensitivity applications, we see that as really the answer that allows them to get the benefits of both the geo and the low-latency terrestrial. What happens, I think, primarily for customers is that as we look at rolling this out further, we expect to get a fair amount of our market coverage there. And so we think it'll really be a good premium service for customers.

Great. And any material margin impact?

Well, that remains to be seen a little bit on the percentages. You know, obviously, as we're buying capacity from other players, that is a lower margin than our, you know, than our own assets. But at the same time, there's limited capital investment we make to get that. So that might tend to balance out.

Great. If I may add also to that, we're expecting a significant churn improvement, and we have seen it already from, you know, from diffusion product. So while the fusion product may, on its bill of material, you know, cost and gross margin not provide as much margin as you would get from using our own product, we see a significant improvement on churn, which compensates for that margin drop. So net-net, we think, is an incredible product, and we have received fantastic receptiveness from the marketplace so far.

Great. Great quarter. Let us know when you got a launch date.

Absolutely will. We are anxiously waiting ourselves, and I think we're making great progress there, inching forward every day. And listen, we have had a great year, thanks to Paul and the team. We have had a great year in a market that we were underhanded simply because of a lack of capacity and a brand-new system shows up with no traffic on it. And for the first time ever, the satellite industry introduces the term unlimited, although it's no longer unlimited. Now, that limitation has been placed, and the prices have been raised, and capacities have been used. But during the year that we had the maximum headwind, I think we delivered a growth here, both on revenue and EBDA. And I think we are excited about when Jupiter 3 shows up. how we can, you know, much more effectively compete.

Okay. Sounds good. Thank you.

Please stand by for our next question. Our next question comes from Michael Rollins with Citi.

Your line is now open.

Thanks. Just a couple questions. First, I'm curious, as you're greenlining some of these projects and looking at other projects to leverage your assets and capabilities, what are the average payback periods that you're targeting for those investments, including the constellation for the S-band that you were describing earlier? And then the second question is just a capital allocation question. As you have these different investment opportunities now in front of you, should investors expect a deliberate change in capital allocation and pausing the buyback activity to just provide more financial flexibility over the next 12 to 24 months as you're thinking about these different options? Thanks.

Right. Several comments and some questions. Well, the simple one to answer is we believe – the investments we are about to make and we are making are accretive and improve our financial position in terms of margins and returns and over the horizons that typically are associated with capital investments in this industry. This industry, obviously, the capital investments are made a few years in advance and there's no way to change that. However, we believe the margins associated in our models with any new investments would be at least as good as what we have historically done and potentially significantly better. Otherwise, we wouldn't be going there. And second is related to our share buyback. we stopped the share buyback because we believe we are able to, in the longer term, we are able to generate significantly additional performance and gains beyond buying our own shares. And we do have use cases for our capital and we'll have demands on our capital that we think would serve the shareholders best. That's why we stopped the share buyback, even though we absolutely believe that our share price is grossly undervalued. We think we still are better off and our shareholders are better off allowing us to use that capital to develop the business and put the business in a much faster growth trajectory.

Thank you.

Please stand by for our next question. Our next question comes from Rick Prentice with Raymond James.

Your line is now open.

Thanks. Hey, I have a few follow-up questions. I could continue along the S-band line here. In the 10-K, it talked about you have the S-band terrestrial as well as satellite authorizations in Europe, Mexico, and Chile. And in the process for applying and receiving additional authorizations, How should you think about what other regions of the world S-band might be of benefit to you? And who do you see as the most significant other operators or other companies that have S-band out there?

Hi, Rick. It's Dean.

So in terms of regions of the world, we're really – focusing on that from a commercial perspective, which are the regions that are going to be the most central to the most customers at the earliest stages of the project. And so we have a worldwide approach to market access, and we're well underway with that. It's bolstered significantly by the top priority position that we enjoy at the ITU level with the Sirion 1 filing. So that's the cornerstone of the effort. And market access will, to a large degree, follow the deployment of this new system, the 3-on-1 system, as we have satellites to actually land traffic in jurisdictions. We'll find that we'll get more and more market access there. I think in terms of competition, it'll probably vary from one region to the next. But we feel like with our technology and with the rights that we have through the IDU, we're very well positioned to be the leader.

And within the U.S. specifically, I think sister company DISH has some AWS spectrum that has a similar band. Where are your rights as far as being able to do something in the U.S. with your experience?

Yeah, we're not at a point right now where we're making announcements or public statements on that, but there are multiple directions that we can go with that.

And I think you also mentioned that enterprise has continued to grow as a percent of the revenues at Hughes. I believe it was about 22% I think in this recent quarter. How should we think about where enterprise goes over time as far as a mix?

Yeah, Rick, well, if you look at it, I think the last

Here and as we look forward next year or two, we see the enterprise business continuing to grow. And of course, you know, we've had the consumer business, you know, waiting for our new Jupiter 3 satellite system. So that mix probably a little hard to project going forward because we expect to see both segments grow going forward. So I think can't give you a specific number on that.

Okay. And obviously, enterprise has grown as consumers have been under pressure. A consumer can grow. So there's no set kind of goal of trying to get consumer and enterprise to a 60-40, 70-30, 50-50 kind of mix. There's no set kind of target from that standpoint.

No, not at this point, no.

And one just mundane question. On the corporate side and the financials, the corporate costs of overhead came in a little higher than we were anticipating, but I think we had some requirements out there about what the right level of corporate overhead is as you have Hughes and Hughes growing and ESS maybe getting larger too over time. Are you at the right level, and is this the level of this quarter that we should think about, or is the annual level right, or how should we think about run rating corporate overheads?

Yeah, Rick. Rick, this is Terry. Yeah, we did see a little uptick there. And just to remind you, in addition to the corporate expenses, that does include a lot of our corporate development activities, you know, associated with the new projects we're doing around S-band. You know, so there was, you know, some general increases in there, but also seeing a little bit of activity associated with our new project. You know, I think that level that we're at is obviously we'll do, we do everything we can to keep that at the levels we're at. But, you know, that's, I think that's an okay, you know, run rate going forward here into the near future.

But, Rick, let me just add from my own business philosophy perspective, we're not adding management overhead. If that's what your concern is, you know, these are maybe shown up at a corporate level, but it's not adding additional management. In fact, if anything, since I joined the business, we have significantly streamlined our management and reporting lines in order to make sure we have more of a flat organization as evidenced by the fact that we have here, we have Paul representing the entire globe's front side of the house and so forth. So there is some numbers there, but definitely they're not corporate overhead as we traditionally refer to them.

Gotcha. And then final one for me to wrap it up. The ESS business, which is albeit very small, did see a noticeable uptick in EBITDA. We had been thinking there might be some fall off at some point in the ESS business. How should we think about what's in the ESS line item and what the trend lines are for that small kind of residual segment?

Yeah, Rick Terry here. So, yeah, we've seen a real nice uptick, you know, into that business. You know, it's still the business is primarily, you know, third-party leasing on the 105 and Echo 9 satellites. So, made a lot of progress there in terms of selling additional capacity there here, you know, towards the end of 2022. So, look, I think, you know, the plan is to keep it at those, you know, levels, hopefully increase it, you know, continue to increase it a bit here as we go into 2023. You know, just, yeah. So, look, I think we're at a pretty good level that we saw in Q4. Okay.

Very good. Look forward to seeing you all soon, and take care. Have a good day. Thanks, Rick.

Please stand by for our next question. Our next question comes from Chris Quilty with Quilty Analytics.

Your line is now open.

Okay, Terry, since you brought up the segment reporting, I got to say I was hoping that with the 10K we might get some better segment reporting than how it's broken down today. But I guess given that Dave just left, there's probably a pretty heavy lift without a new CFO. But when we think about the business going forward, when we take something like the S-band constellation getting on orbit, is that all in the ESS or – If you're building equipment for it in the Hughes segment that's sold out through the ESF segment, I mean, is there a way that we can think about the business on a go-forward basis of how you're going to organize it into enterprise versus consumer or some other structure? Because the current structure, I mean, there's a lot buried within the Hughes segment in terms of other business lines that we really can't see. and would love to get a little bit more visibility on that, which I think would help with investors and your valuation.

Chris, we understand that. We appreciate your point of view, and we agree with it. We have a business that is in transition. Both you have seen, first of all, the growth of our enterprise business. You have heard about our aspirations and goals to make a significant business out of our S-band and enter new era of growth through that. And we're also looking at M&A through other arms of our enterprise business unrelated to the S-band. I think 2023 will be a year of uh i guess transition for us as we kind of move forward with this horizon two and horizon three and horizon one which is an optimization of what we have had as you have seen we've done a good job and keeping the show running but horizon two and three which um you know we are working on in 2023 kind of shaped the business going forward in a significantly different way we expect and as a result of that it would be imprudent for us to go ahead and you know introduce additional segment details just to come and change them nine months later. I think you would want us to get our act together, be more definitive with what we are planning to do and how we're progressing, and then provide additional detail. We do intend to do that. It'll just take us some time to get it right. And yes, not having a CFO, perhaps something to do with it, but I don't really honestly think that is the driver. I think the driver is that even with a CFO, our business is changing. We need to know What is relevant? How much of our attention is going to be focused on what? And we have multiple avenues of growth and development, and we are focused on all of them. And, you know, we'll find out this year which ones are most applicable for the investors, and we do intend to make additional disclosures of that information.

I'll hold you to it. I heard 2024 new segment reporting. So a second question. Did you give any guidance that I missed around CapEx for this year? Obviously, you've got the Jupiter 3 program tailing off. There is no new satellite program in the bucket. And I think on their call last week, you know, Viasat said they expect their CPE-related CapEx to be up, you know, threefold once the satellite launches. Is that a you know, reasonable assumption that you're going to be shipping so many damn terminals that, you know, the CPE, or sorry, the CapEx isn't going to really see a fall off in 23?

You know, I think you should expect our CapEx to be similar to what you have seen, and you should not expect us to be vastly different. And that's because a combination of offsetting effects, you know, we, some of the CapEx that we typically had had to pay for Jupiter 3, we won't have to pay. That satellite, much of that CapEx has been paid for. But on the other hand, you'll see us acquire additional customers, significantly additional customers, eating up some of that CapEx savings. So all in all, we're not expecting a disruptive step function change in our CapEx on an annual basis. I mean, don't hold me to every dollar of that, but we're not seeing... In no way we are stating that our CapEx is going to have an impressive jump of any kind.

Gotcha. And where does the ground segment sit today? I think, are you building, what is it, like eight gateways and there are QV bands and the new technology? Have you been able to do any testing on that? Yeah.

Chris, we've touched on them. Over 18 sites installed. There's a number of different combinations of locations in our network, because we have a cloud architecture. Except for two sites, they're all completely installed. And we've been able to test some of these sites on an existing capacity we have on Echo 9. So we have pretty far along in all of that process. We're very sure of the actual technology, as I mentioned earlier. We've actually deployed it in this configuration for two other customers. So we have a lot of operating experience on it as well.

Now, wait a second. When was Echo 9 launched? You actually had QV band on Echo 9?

No, we had KA. The QV, we've not been able to test in that fashion, but we got good laboratory testing of that. So we're pretty sure how that will operate as well.

Gotcha. And a question that Rick asked about the enterprise and consumer mix brought up a question, which is, if I just think about Jupiter 3 as a platform, is the emphasis going to be able to reserve more of that capacity for enterprise customers? And do you think of enterprise in things like IFC? Or when I look at North America with SES 17 and Viasat 3, you know, that's a market where you'll continue to serve it from a distance?

Well, I think two things. One, for Jupiter 3, in Latin America, South America, we're optimizing the capacity for yield. So there we expect to continue to add additional enterprise, significant additional enterprise business. So the blend of the consumer versus enterprise will vary over time depending on where we think our best yield is. In North America, we still anticipate having applications for our capacity in the enterprise space, so it won't be just consumer, but we're still working on those opportunities. I have nothing at this point to relay.

All right, that's it for me. Thanks, guys.

Thanks, Chris.

At this time, I show no further questions. I would now like to turn the conference back to Terry Brown for closing remarks.

Yeah, we'd just like to thank everybody for joining today and looking forward to talking to you again soon. Thank you.

This concludes today's conference call. Thank you for participating. You may now disconnect.