Consumer Broadband Proving Recession-proof for Hughes

by

PARIS — Satellite broadband hardware and service provider Hughes Communications on Feb. 24 said its U.S. consumer business is showing almost no sign of the recession, with monthly attrition rates dropping even as per-subscriber revenue increases and total subscriber growth continues.

The consumer business contrasts with Hughes’ corporate network sales of satellite terminal hardware, a business that is receding in importance for Germantown, Md.-based Hughes as it focuses on services.

The services trend in Hughes’ overall revenue has been accelerated by the fact that many of its consumer broadband subscribers elect to rent their broadband gear as part of a package that includes the subscription cost, rather than purchase it. Between 55 percent and 60 percent of new subscribers select the rental option, Hughes said.

The growth of the U.S. and Canadian broadband business — Hughes recently booked a multiyear, $100 million order with a Canadian broadband service provider — is making it easier for Hughes to migrate the business from Ku-band satellite capacity leased from other satellite operators onto the Hughes-owned Spaceway 3 Ka-band satellite.

In a conference call with investors, Hughes Chief Executive Pradman P. Kaul said the company now has 250,000 consumer broadband subscribers on Spaceway 3, or nearly half the total subscriber base of 504,000 as of Dec. 31.

The HughesNet service’s subscriber count increased by 17 percent in 2009, while the company reduced its monthly churn rate — the number of subscribers quitting the service — to 2.2 percent, compared with 2.4 percent in 2008.

Average revenue per subscriber increased to $70 a month from $68 in 2008, in part because new subscribers are opting for higher-priced subscriptions that deliver greater bandwidth, Hughes officials said. The company said that subscriber revenue during the last three months of 2009 averaged $72 per month.

New subscribers, almost all of whom are being loaded onto Spaceway 3, bring a double benefit to Hughes. In addition to adding revenue through their subscription payments, they enable Hughes to use subscriber churn to end leases of Ku-band capacity that has averaged $160 million per year over the past three years, or $1.5 million per leased satellite transponder per year.

Kaul said the company continues to reduce its total leased transponder count by one per month, on average, a rate that allows Hughes to reduce its costs by around $18 million per year.

Hughes has been one of the biggest customers for Ku-band satellite capacity in North America in recent years. The company’s gradual withdrawal from this market is one of the key factors putting downward pressure on overall Ku-band pricing in North America.

Kaul said it is the consumer broadband business that, through increased revenue and gradual cost reduction, drove the increase in earnings before interest, taxes, depreciation and amortization (EBITDA) for 2009.

For the full year, Hughes reported revenue of $1.01 billion, down 4.8 percent from 2008 as decreases in the corporate satellite-terminal business and the expected decline in Hughes’ mobile satellite system development contracts offset growth in the North American broadband business.

But EBITDA for the year was up by 14.8 percent. EBITDA was 17.2 percent of revenue in 2009, against 14 percent in 2008. Revenue from the consumer business totaled $420 million in 2009, up 12 percent over 2008.

For Kaul, the good news in the corporate networks business is that while total revenue declined, the services portion of the business grew. Gilat Satellite Networks of Israel, a Hughes competitor in the corporate and civil government satellite network services business, also reported a decline in hardware sales in 2009 and, like Hughes, forecasts at least a partial rebound in 2010.

Hughes Chief Financial Officer Grant Barber said the company spent $44 million in 2009 on its Jupiter Ka-band satellite, to be launched in early 2012 to expand the North American business by offering 10 times more bandwidth than Spaceway 3.

Kaul said Jupiter remains on schedule at manufacturer Space Systems/Loral of Palo Alto, Calif., and that Hughes expects to make construction-milestone payments of about $120 million to Loral in 2010.

Hughes has joined forces with several other satellite broadband providers to make the case that the U.S. economic stimulus package should include satellite services among those that receive funding. While the U.S. Rural Utilities Service has indicated that $100 million in second-round broadband stimulus funds will be available to subsidize consumer purchases of satellite broadband services, Kaul said it remains unclear when and how the funds will be allocated.

He said the “limited clout that the satellite industry has” among Washington policymakers has made it necessary to assemble an industry-wide team to lobby for stimulus funds.