November 04, 2010 - 12:18pm EST by
2010 2011
Price: 31.60 EPS $0.00 $0.00
Shares Out. (in M): 23 P/E 0.0x 0.0x
Market Cap (in $M): 704 P/FCF 0.0x 0.0x
Net Debt (in $M): 497 EBIT 220 280
TEV (in $M): 1,200 TEV/EBIT 5.5x 4.3x

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Investment Thesis:

Hughes Communications, Inc. ("HUGH") offers the opportunity to acquire a fast growing consumer broadband business at a depressed 5.0x EBITDA multiple. The Company has recently released guidance implying organic EBITDA growth of 20% per annum through 2015 with a clear path to such levels. The Company trades well below its peers, has strong growth and limited competition in its core consumer market and has a number of defensible barriers to entry. The Company's expertise domestically is easily transferable internationally where market size and growth could be significantly larger. Despite all these positive attributes and limited risks, the market has failed to recognize the opportunity.


HUGH is the world's leading provider of broadband satellite network equipment and service to the very small aperture (VSAT) enterprise market and is the largest satellite Internet access provider to the North American consumer market. HUGH has a 55% market share worldwide and over 80% in North America in the enterprise market. In the consumer broadband market, HUGH serves over 550,000 consumer customers.

Basic company financials are laid out below:

Shares Outstanding: 22.7mm
Share Price: $31.00
Equity Value: $703.7mm

Net Debt: $496.8
Enterprise Value: $1,200

Sea Launch Credit: $44mm
COFACE Financing: $115mm
Adjusted Net Debt: $567.8
Adjusted Ent. Value: $1,272

LTM EBITDA: $212mm (5.6x/6.0x)
2011E EBITDA: $280mm (4.3x/4.5x)

HUGH was spun off from Skyterra communications in February 2006, following Skyterra's decision to separate HUGH from its spectrum assets. Hughes is controlled by Apollo Advisors who own approximately 66% of HUGH, which limits liquidity. Aside from its strong enterprise business model, HUGH growth has been driven by its consumer business, which offers a broadband alternative to those rural customers lacking access to a viable terrestrial alternative.

In August 2007, HUGH launched Spaceway III, a high-capacity Ka-band satellite, which allowed it to reduce its utilization of leased transponders as it now controlled its own space segment capacity. The result has been dramatic with EBITDA margins dramatically expanding with an over 50% increase in EBITDA since launch. Currently, over 330,000 customers utilize the Spaceway III satellite of a total 550,000 consumer subscribers.
Market Failure to Recognize Value:

Despite its strong performance and expected continued growth, the market has failed to recognize the company's intrinsic value. Its most recent conference call provides an excellent example. On the call, for the first time (after much shareholder prodding), management delivered long-term guidance. These expectations include:

1) Annual 10% revenue growth through 2015
2) 2015 EBITDA margins of low-mid 30%
3) Net consumer subscriber adds of 75,000 per annum
4) No incremental capex beyond maintenance capex of $20-35mm per annum and Jupiter satellite expenditure (see below)

Based on this guidance, revenues would increase from approximately $1,060mm in 2010 to $1,700mm in 2015 and EBITDA would grow from $215mm to $550mm. At a conservative 5x multiple and a 15% discount rate, the stock should trade at approximately $60, instead it trades at approximately $31.00, hardly moving on the release of this long-term guidance. The Company confirmed that its guidance is purely organic and that it does not include acquisitions.

What is even more surprising about the lack of market reaction to the company's guidance is that this same management team has achieved every goal it has set out to the market since its spin-off from Skyterra. The fact that the business model is driven by consumer net adds of approximately 21,000 per quarter is more or less in line with its historical performance. In the near term, the already announced $58mm ($551 per new subscriber) government broadband subsidy should further accelerate near term consumer adds.

Business Model: HUGH operates in 3 business segments.
• Enterprise VSAT essentially provides large enterprises with high-quality broadband connectivity across every site, regardless of location, allowing customers the ability to aggregate store-level data and other 2-way data communication capabilities (such as e-learning). Enterprise VSAT networks are critical to the effective management of any large multi-store enterprise. Enterprise, which is a major factor driving HUGH's extremely high renewal rate. VSAT comprises approximately 61% of total revenue. Customers generally enter into contracts of 3-5 years. HUGH generates revenues through hardware sales for each site and service fees for managing the network. Approximately half of HUGH's revenues in this segment are generated from equipment sales. Customers include retailers, such as Walmart, oil companies, such as Exxon, restaurants, such as McDonalds and many others.\

• Consumer broadband consists of subscribers in North America who desire high-speed Internet access, but typically are not served by either DSL or cable. The North American consumer market is estimated to amount to 10-15 million households and 3 million businesses. The vast majority of HUGH customers currently lack a terrestrial alternative. Churn is approximately 2% and ARPU is $75 per month (up from $60 18 months ago). The only competitor in the space is Viasat/Wildblue.

• Telecom Systems consist primarily of mobile satellite systems (6% of revenues) and supplies turnkey networking and terminal systems to these operators. Customers include Inmarsat and Thuraya communications.


HUGH has no direct comparable. However, two companies can be used to derive a proxy valuation - Viasat ("VSAT") and Gilat (GILT). Viasat business consists of two parts: 1) a defense electronics business and a 2) broadband satellite consumer business. Viasat's acquired its broadband satellite business through its recent acquisition of Wildblue at a 7.5x LTM EBITDA multiple. However, it should be noted that Wildblue operates through a wholesale business model with lower margins and at the time of purchase had a fully utilized satellite implying little to no growth. Viasat acquired Wildblue essentially to enter a new business line given its previously announced 2011 consumer satellite launch.

Gilat ("GILT") sells VSAT terminals to enterprise customers. It is significantly smaller than HUGH with a far less dominant position. Gilat trades at a 9x multiple.

Other satellite companies (Inmarsat, SES Global and Eutelsat) trade at 8.0x - 9.0x EBITDA with dramatically less expected growth.


1) Enterprise VSAT market share declines and margin compression accelerates in the face of competing technologies. Without discounting this potential threat, few of the competing technologies are new and HUGH has maintained its market share and margins over the past few years through (i) limitations on other technologies in providing a true, 2-way point-to-multi-point offering; (ii) existing contracts which have not rolled-off; and (iii) repositioning of HUGH's offering to include managed service offering to include both satellite and land-based alternative. Over the past two years, the enterprise business has suffered declines due to the economy; however, during their Q2 conference call, management was enthusiastic about new wins and the apparent "opening of the corporate wallet". The enterprise market can be typified as mature.

2) HUGH's consumer build-out could face intensified competition from either Viasat or terrestrial alternatives (if they ever become available). Viasat through Wildblue offers a similar service to HUGH via a wholesale model versus HUGH's retail model. While Wildblue has launched and operates 1 satellite (thereby saving on transponder costs), it markets its products through a variety of channels such as AT&T and more recently DirectTV, paying commissions to each of these providers. Wildblue's current satellite is "full" and Viasat is in the process of launching a second satellite during CY2011. The new satellite will offer speed and capacity advantages to Hugh's offereing. However, the market is deep and underpenetrated (approximately 10% penetration) and HUGH customers are locked up on two year contracts. In 2012, HUGH will launch a comparable satellite through its Jupiter program.



• Market recognition of the tremendous growth and proven execution supported by Company long-term guidance
• Announcement of accretive acquisition of the company
• Increased liquidity through accretive share issuance
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