Hughes' HUGH revenues were light during the third quarter as hardware sales, which tend to be lumpy and are difficult to forecast, fell well short of year-ago levels. The firm's services business, its primary focus, continued to perform well, however. Services revenue grew 12% year over year during the quarter on strong consumer Internet access customer additions. The services business typically generates significantly higher margins than hardware sales, and Hughes' services margins have also expanded nicely throughout 2009 as it has moved customers off of leased transponders. The combination of shifting revenue mix and improving services profitability lifted the operating margin, excluding depreciation and amortization, to 17% from 13% a year ago. While capital spending is up sharply this year versus 2008, free cash flow turned positive for the year during the quarter. Management also commented on Viasat's VSAT decision to acquire WildBlue, a rival consumer satellite Internet access provider. The market won't change dramatically as a result of this deal--WildBlue already uses Viasat's equipment to provide its services--but we do believe there are positives and negatives for Hughes. On the plus side, the deal eliminates a competitor as Viasat is planning to launch a satellite of its own in 2011. On the other hand, that satellite capacity will enable WildBlue, an established player in the market, to expand more rapidly than it otherwise would have. Importantly, Hughes doesn't believe it will run out of capacity on its Spaceway satellite before its next satellite, dubbed Jupiter, launches in 2012. Hughes also announced recently that it has sold a chunk of capacity on Jupiter under an agreement valued at more than $100 million, a welcome development that defrays some of the risk in launching the new satellite.
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Analyst Notes
07-02-09 | 2:53PM Hughes Adds a Satellite
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