Ladies and gentlemen, thank you for standing by and welcome to the EchoStar earnings conference call for second quarter of 2020. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one on your telephone. If you require any further assistance, please press star zero. I'd now like to hand the conference over to your speaker for today, Mr. Terry Brown. Thank you, sir. Please go ahead.
Thank you, operator. Good morning, everybody, and welcome to our earnings call for the second quarter of 2020. I'm joined today by Charlie Ergen, our Chairman, Mike Dugan, our CEO, Dave Rayner, COO and CFO, Pradman Kaul, President of Hughes, Anders Johnson, Chief Strategy Officer and President of EchoStar Satellite Services, and Dean Manson, General Counsel. As usual, we invite media to participate in the 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 this over to Dean for the safe harbor disclosure.
Thanks, Terry. All statements we make during this call, other than statements of historical fact, constitute forward-looking statements that 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 and quarterly report on Form 10-Q filed 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. I'll now turn the call over to Mike Dugan.
Thank you very much, Dean. Thanks, everybody, for joining us in the call today, and we hope you and your family are still safe and healthy. With the COVID complexity, it was an unusual quarter from the EchoStar team. When our customers need us the most, we kept them connected to vital information, entertainment, social service, medical, education, and business applications. Although the demand for our services continued to remain very strong, we also had to implement cost savings initiated to help preserve our margins during these uncertain times. We are placing top priority on protecting the safety and health of our employees while effectively maintaining productivity and keeping up our pace of engineering innovation and also keeping all of our customers happy. Let me now turn it over to the management team. First, Pradman, you're up.
Thank you, Mike. Despite all the uncertainty driven by the COVID pandemic, foreign exchange headwinds, and the OneWeb bankruptcy filing in Q1, we grew Hughes adjusted EBITDA by 20% over last year. The adjusted EBITDA margin for the second quarter was 41% compared to 34% last year, and our HughesNet subscriber base grew by approximately 26,000, ending Q2 with 1.542 million subscribers, including approximately 321,000 subscribers in Latin America. Much of our U.S. network is operating at full capacity, and we continue to stay focused on providing an outstanding customer experience while also managing churn. With the expiration of the FCC pledge on June 30th, we will resume more normalized U.S. sales activity with continued strong order pools in the second half of the year. We also expect to continue subscriber growth in our international consumer markets.
Regarding the JUPITER 3 program, we still expect the satellite to be launched in the second half of 2021, and we are in active discussions with launch providers. Switching to our North American enterprise business, Q2 saw lower than normal installation activity in April and May due to the COVID-19 impact on our customers. Activity was recovering by June, and we are currently engaged in catching up on activity that had been delayed. We've also had a lot of new contract activity recently, including a multi-brand restaurant company and a retail chain, each with thousands of sites. In addition, customers in the retail petroleum space are upgrading their networks to accept credit cards with chip technology at the pump. We also secured a contract to sell network operation center systems to Telesat to upgrade two of their existing hubs with JUPITER technology.
On the international enterprise side, we are pleased to announce several new awards in India with large customers in the petroleum, banking, and communication industries. We've also deployed a regional Ku-band broadband maritime service along the Indian coastline. Initial contracts for that service have been signed with four shipping companies. As many of you know, the JUPITER system is already the world's de facto standard for satellite broadband systems. Today we are pleased to announce that Cignal TV in the Philippines has selected us to enable satellite broadband service to its 2 million subscribers. Also in the Philippines, Speedcast is using a JUPITER system to add 2,000 locations to their community Wi-Fi hotspot project. Telefónica del Perú has expanded their network of 4G cellular backhaul by an additional 400 locations. Our government and defense business continues to build momentum.
We have significant activity with partners in addressing opportunities with the Social Security Administration. We also had two very successful demonstrations of our through-the-rotor-blade HeloSat capability aboard a Black Hawk helicopter. We announced last week that we have agreed in principle to join the consortium of the U.K. government and Bharti Enterprises purchasing OneWeb from bankruptcy. We are excited about continuing our involvement with OneWeb as an investor as well as a technology and distribution partner. We see many strategic synergies ahead for our business as complex hybrid networks become the norm of our industry, with GEO satellites complemented by LEO and MEO satellites, as well as terrestrial connectivity. In this hybrid structure, LEOs can deliver ubiquitous coverage and low latency, while GEOs bring high capacity at the lowest possible cost wherever needed, especially in areas with limited or no terrestrial access.
The combination will increase the size of the market we can address significantly. GEO satellite high-speed services continue to be the most viable technology for cost-effectively serving customers in low-density areas. We believe the near-term focus of LEO networks will initially be on enterprise verticals, including cellular backhaul, aero, maritime, and government applications in unserved and underserved markets. We also expect GEOs to maintain its significant cost edge in markets where the lowest possible latency is not a top priority. We continue to monitor activity related to the FCC's Rural Digital Opportunity Fund, RDOF for short. The auction provides incentives for lower latency and high-speed services, which clearly advantages fiber, and to a lesser extent, fixed wireless service in the denser census blocks. Given the high build-out costs associated with these technologies, we believe modest phase 1 funding will remain for the lower household density markets that HughesNet serves.
For this reason, we do not anticipate any negative material impact to our target market due to its size and the cost challenges of serving the low-density areas. Despite the technology bias of the RDOF, we have filed an application to participate in phase 1 bidding, which is expected to begin in October 2020. We see potential economic upside if we can ultimately secure funding. Although GEO has the economic advantage over LEOs in the rural low-density markets, the RDOF market program could potentially subsidize a LEO service offering due to the latency rules. Based on our recent announcement, we have the opportunity now to augment our GEO offerings with OneWeb capacity and a more favorable positioning for RDOF funding. Overall, I'm very pleased with our performance and outlook. Our consumer business remains strong.
Although our enterprise business has slowed during the pandemic, it's both diverse and resilient, and we anticipate recovery in the second half of this year and in 2021. We are excited about the opportunities associated with all aspects of our business as it continues to evolve. Let me now hand over to Anders.
Thanks, Pradman. Good morning. In Q2, ESS continuing operations revenue was $4 million, up slightly from Q2 of last year. We continue to pursue opportunities to lease our excess capacity during these challenging economic conditions. On the global S-band front, the launches of our first pair of new satellites for our EchoStar Global subsidiary, delayed due to the pandemic, have been rescheduled for the third quarter of this year. Business development activities are continuing, and we are gratified to see a lot of interest from a range of vertical players supporting the EchoStar Global mission. Our European subsidiary, EchoStar Mobile, also continues to see strong interest in its new products and services.
As pandemic travel restrictions have eased, our proof of concept activities are ramping back up, and we are seeing a lot of appetite for the application of MSS technologies to emerging verticals such as autonomous platforms and 5G integration. As always, full integration of S-band satellite services into 5G networks remains our longer-term strategic goal, and we continue to explore ways to integrate our complementary ground component authorizations into these and other developments. I'll now turn it over to Dave.
Thank you, Anders. As in previous quarters, I will be speaking to our adjusted EBITDA measurement. The measurement excludes from EBITDA certain non-recurring items as well as gains and losses on our investments and unrealized gains and losses on foreign exchange. More details are in the GAAP to non-GAAP reconciliation on our earnings release. We believe adjusted EBITDA more closely represents our operating efficiency and financial performance. Consolidated revenue in the second quarter was $459 million, relatively flat compared to the same period last year. Hughes revenue was $453 million, slightly higher than last year despite negative foreign exchange impact of approximately $12 million. The strong growth in Hughes Consumer Service was offset by lower equipment sales, primarily driven by the impact of the OneWeb bankruptcy and lower domestic and international enterprise services.
ESS revenue in Q2 was $4 million, up slightly to the same period last year, while corporate and other revenue decreased about $3 million due to certain real estate being transferred to DISH in Q3 last year as part of the BSS transaction. Consolidated adjusted EBITDA in the second quarter was $161 million, an increase of over 19% from last year. Hughes adjusted EBITDA in Q2 was $186 million, an increase of $31 million from last year. The margin associated with the growth in consumer revenue, lower sales and marketing spend on our domestic consumer service, and lower G&A spend were the main contributors to the large increase. Corporate and other was slightly lower as a result of the reduced revenue and increases in losses in equity of affiliates. Our net loss from continuing operations was $15 million in Q2 compared to a $30 million loss last year.
The largest components of the change were an increase of $39 million in operating income, offset in part by lower gains on investments of $19 million and higher income tax provision of $6 million. Capital expenditures in the quarter were $92 million compared to $107 million in Q2 last year. The decrease was primarily due to lower satellite-related spend, partially offset by higher spend on CPE driven by growth in our consumer business. Free cash flow defined as adjusted EBITDA minus CapEx was $69 million during the quarter versus $28 million last year. We ended the quarter with $2.5 billion of cash, cash equivalents, and marketable securities. We feel very good about our cash balance given the uncertainty that the current economic conditions present. It affords us with the flexibility to explore investment opportunities that can foster growth, both organic and inorganic.
With that, I'll turn it back over to Mike.
Thank you, Dave. Very proud of everything that was talked about earlier. During the second half of 2020, we will remain focused on operating our existing business in a prudent manner, carefully managing the construction and delivery of the JUPITER 3 satellite and looking for additional growth opportunities. We'll continue to adapt to the challenge of the COVID-19 pandemic, which has affirmed the need for global connectivity and communications. Let me now turn it back to the operator to start our Q&A session.
Ladies and gentlemen, just as a reminder, if you'd like to ask a question, please press star and then the number one on your telephone keypad. Once again, that is star and the number one. Our first question comes from the line of Ric Prentiss with Raymond James.
Thanks. Good morning, guys. Glad to hear you're doing well through the COVID-19 pandemic, both personally and business-wise. Question is for Charlie. Appreciate he being on the call today. I think it's maybe been two years since the last time on an EchoStar call when you talked about the Inmarsat offer. A lot of progress at DISH moving beyond pay TV into wireless 5G. Maybe you could take the opportunity to update us on your vision for EchoStar, how you see things playing out and how it fits into your view of the future.
Okay. Thanks for the question. I mean, the big picture is that, obviously we've been primarily a satellite company and in that we've believed in connectivity and said that's a place where the world needs to go. The pandemic has shown us all that connectivity and broadband access is a necessity, and t hat's around the world. EchoStar is well positioned. I think the big picture is we'll continue down that path, but I think it may be a greater emphasis on the broadband side as well and we're well positioned to do that. We've been patient almost to a fault, now with $2.5 billion of cash, no net debt in the company, and in a world where at least within some of the satellite community some of the businesses are going to be challenged for several years.
We're well positioned with a strong balance sheet, maybe one of the strongest balance sheets in the industry, to move forward and take advantage of opportunities. To the extent that opportunities don't exist, we can internally grow our business through a variety of methodologies. You see a little bit of that when Anders talked about S-band, which is an opportunity to connect the world to a low frequency. Our continued interest in OneWeb, which will come out of bankruptcy a much stronger company. It was always a challenging business plan to start, because of bankruptcy, it's one of those companies that comes out, we think it'll come out in a strong position. We continue to maintain an interest there, a small interest financially, but a much greater commitment from the technical side.
When you think about the hybrid spectrum and hybrid network, how do you view where that's playing out? Do you envision EchoStar being able to help DISH in the U.S. as well?
Well, a lot of the stuff that EchoStar and DISH do, because of my involvement in both. Normally, we look at things that might be advantageous. As an example, the next JUPITER satellite has tremendous capability for wireless backhaul. If you're building out, DISH obviously has to build out a network. As it builds out more rural sites, maybe even in places where people aren't today, satellite backhaul can make that economical in a way that maybe hasn't been there before. Part of the JUPITER design is to be able to do that. There obviously are things that we look at between the two companies, if they make sense, and of course, there's things that don't make sense, and the companies go their separate ways.
When you look at S-band, and how that might affect wireless carriers around the world, it certainly is a frequency that you can make the case that you can go from a very small, low-power device, including perhaps your phone, to a satellite. We think that the things that Anders are working on have potential for wireless carriers around the world. As DISH becomes really experts in the wireless world, particularly in 5G and O-RAN architecture, cloud-based architecture, that will pay dividends for strategically how Hughes and EchoStar pursue opportunities as well.
Great. The last one from me is, obviously, you've got a great balance sheet here at EchoStar. What is it that would be of interest in the M&A world as far as what you would want or need to make the EchoStar strategy play out?
Yeah, I think anything where there might be synergy, particularly in the connectivity broadband world with what EchoStar is doing, and companies that can have positive cash flow in the long term. Those are the things you'd look for. There's synergies. There's potentials for an increasing cash flow business. Do they shore up? Do they build on strengths we already have? Do they shore up weaknesses that we have? Those are the kind of things you'd look for out there. There's a lot of great companies out there. Some are going to struggle in the short term, just based on the nature of their customer base. As you said, a strong balance sheet, it's a good spot to be in. We've been patient, and we'll continue to be patient, but if there's opportunity, we certainly would take advantage of it.
Maybe that's why not a lot of stock buybacks, because clearly the stock's been undervalued in our opinion. Keep the cash on the balance sheet looking for opportunities rather than stock buybacks?
Well, I always challenge management. We look at stocks, and we look at dividends, we look at stock buybacks. To the extent that we do that means our management hasn't found a place to put capital, to grow capital or a better return for our shareholders. I keep challenging management to find a better use of our capital. To the extent that we come to the conclusion that perhaps that's not something we're able to do in the foreseeable future, then I think stock buybacks can make some sense. I think we bought back a little bit. Dave.
End of Q1, we bought back a little. In Q1, we didn't buy anything back in Q2.
You never say never, but hopefully we can find a better use of capital. If not, it's something that we continue to do. Our board has given us the authority to buy back, I believe, $500 million of our stock, and that remains a possibility.
Great. Appreciate you being on the call today, and everyone stay well in these difficult times.
Your next question comes from the line of Chris Quilty with Quilty Analytics.
Thank you. I wanted to follow up a little bit on that question of just focusing on the M&A first and then flip back over to internal investment. When you look across the company's portfolio and you've got international operations you've been growing in Latin America, you've got India, you've got a LEO opportunity, you've got your traditional GEO, is there any one of those that stands out to you as an area where, with the capital on hand and given the fact that you've got struggling competitors, that it makes the most sense to step out and maybe perhaps do a bolt-on or find something that's additive to your business in a faster growth path?
Who's that question addressed to? Is it for me? Oh.
To Charlie. I'm sorry.
I'm sorry.
I know what Anders will say, and I know what Pradman will say.
I don't know if there's any one thing that stands out. I think that the ideal situation is something where there's synergy, something where it's somewhere in the satellite connectivity business. Doesn't have to be satellite, but that's in the connectivity or broadband business. Something that can generate cash flow in the long term, even if it needs investment to get there. It's an interesting time. I hope our patience will be rewarded. It hasn't been the last three, four years. From my poker days, I can remember sitting in a poker game folding for eight hours, and you win the last two hands, and you go home a pretty big winner. You had to keep folding for eight hours. You just had to be patient. I think some of those business lessons apply to business as well.
The pandemic has certainly changed people's business plans, and things beyond people's control. Some industries are going to be changed for a while, not long term, but certainly, for a while. We'll see if there's things that make sense for us. We look at it every day.
Maybe just to follow up, I'll throw out a specific example. With the in-flight connectivity market, you guys fortunately have taken sort of an arms merchant approach to that industry, which was the right approach as it turns out. Things are happening right now. Obviously, the industry's hurt pretty badly, but I think most people believe there's going to be assets available. Is that a market that you believe in as a growth market? Is that something that you'd take a look at as maybe a more wholesome stake in the supply chain of what's going on in the aviation market?
Well, it's certainly a long-term business, certainly, there's companies that are well-positioned there. The EchoStar approach has been, I think this is who Hughes and Pradman and his team are. We've chosen to partner with people who need our technology or our capacity rather than compete with them. As a general rule, where somebody has an asset that exists, if they are willing to partner with us, we would rather partner with them rather than duplicate that asset. For the most part, that's what we've done in the in-flight connectivity space where we would partner with just about everybody. Look, as a partner, to the extent that somebody needs help or I think we've been there to help those companies through thick and thin, I think we'll continue to try to do that because we have strong relationships with those companies.
Internationally, we've done the same thing where we've chosen to partner with companies internationally rather than to go it alone or to compete, as long as they're willing to partner with us. Not everybody is, but we have strong relationships with a variety of companies. We feel a lot of loyalty to those companies, they've been good partners for us. I think that's a path that we generally would continue on to the extent that people want to continue to do business with us.
Understand. Final question for Charlie. The consumer broadband business has been a great steady grower for Hughes. Yet, if I look back over the last 10 years, the pace at which you guys have acquired and built new satellites has continuously lagged the actual demand in the market. I think that's happened with both Hughes and Viasat, in fact. When you look at that market, is this a time when it would make sense to perhaps step up the pace at which you replace those satellites? Do you still see a path for improved performance on GEOs? Viasat's already talked about a ViaSat-4 design. Is it a better time to kind of step back and see what happens with LEO?
That's a good question. I'd say a couple of things. One is, one of the things we built in the United States because we knew exactly where we needed our capacity in the United States, and we had both DISH and DirecTV had infrastructure to get to rural customers, that we didn't have to totally duplicate that. The North American market, it's kind of a unique market for us. Internationally, we've chosen to partner with people on the international side because there's government regulation. It's a different kind of animal. We already had facilities in South America to some degree. We've now partnered with Yahsat in Brazil, and in Africa. We're pretty gung-ho on the international market, but we don't want to go it necessarily alone due to the complexities of the regulatory and operating environment internationally.
We want strong local partners, and as we find people who are willing to commit to that, we're certainly willing to invest money there. On the future satellite side, I think we've been prudent in how we do it because there are two technologies that are, actually three technologies that will compete with GEOs, which will be MEOs and LEOs, but also terrestrial. Based on a lot of things we've learned on the DISH side on 5G and architecture, and we think that on the terrestrial side, there's opportunity that will take away some of satellite's opportunity from a GEO perspective. We think LEOs and MEOs, to the extent that you can build economical phased array antennas, that will be a game changer.
Those don't exist in the marketplace yet, but there's certainly an awful lot of people working on them, and to the extent you get a low-cost phased array antenna, it'll take away one of the advantages of GEO. We've been prudent about it. We know that our next generation satellite, that we know we need demand in North America. We know where that demand usage is. We're basically at full capacity today, so we desperately need that capacity. We think there's other opportunities in addition to GEO around the rest of the world, and we think there's opportunities in the United States that don't include GEO as well.
The big picture is I think we have as good a handle on satellite as anybody in the industry, and we have a strong balance sheet to take advantage of it to the extent that there's a paradigm shift that starts moving the industry in a different direction.
Great. Thank you for the responses, and don't be a stranger. Good to see you sometime sooner than the next year.
I promised I'll be around once a year. I don't have any due to the pandemic, so they felt sorry for me and invited me.
Oh, very good. Thank you.
Your next question comes from the line of Giles Thorne with Jefferies.
Thank you. My first question was back on the topic of OneWeb. I'd be interested to hear Pradman's comments on why the previous business plan didn't work and the new business plan will. That'd be my first question.
Yeah. I think the focus of the new business plan is to go for the mobility market and the enterprise market and the government market, as I said in my earlier comments. I think that one of the common elements of those markets is the cost of the consumer antenna is not a big factor. Unlike the consumer market where you need a phased array antenna, as Charlie mentioned, that doesn't exist today, but will eventually come into play. I think it's timing, where the antenna wasn't there, and by bringing them out of bankruptcy, obviously, you're a much stronger company because the investment in the old stuff is no longer hurting your balance sheet. I think the last, probably, element is the two major partners are totally different types of people.
You've got the United Kingdom government, which obviously has an infinite size balance sheet, and then you've got one of the largest wireless service providers in the world, Bharti, as the other major partner. Bharti obviously has over what? Over 400 million subscribers. They bring a lot of strength in India and Africa to OneWeb in terms of cellular backhaul and other rural applications. They're also very big in Africa, so they'll complement our YahClick joint venture. They also obviously have raised, I think, over $14 billion so far for their wireless network, so they know how to raise money. They're very successful. Between them and the U.K. government, I think they have a big leg in their current plan than they did in the previous plan.
Just picking up on that, if I remember correctly, OneWeb pivoted pretty hard from consumer to enterprise, new government mobility a long time ago. That's not a new phenomenon. That happened, I want to say 18 months, maybe two years ago. I don't really understand that comment. I suppose the comment around the antenna makes a bit more sense. Could you maybe just give us a bit more color on what's the antenna side of things?
Right. The point is that in the current business plan, they don't have much emphasis on the consumer market because they don't have the antenna. The previous business plan had a significant focus on the consumer market, but the antenna technology and cost was not there. The two didn't gel. That is what that comment was all about. The second element is obviously the shareholders and their ability to continue funding the development of the business plan.
Okay. Understood. Just more specific, so sticking with the antenna. If I think about satellite antenna development, then the first thing that comes to mind is Phasor. Can you just give us your color, because you've got better visibility than certainly me, into what you're seeing on the antenna side that gives you confidence?
There are probably maybe 5- 10 companies that are spending a lot of energy and time on trying to develop a phased array antenna at the cost points that we need to. Each of these markets has different cost points. The consumer market would obviously want a phased array antenna, maybe $100- $150 maximum. The aeronautical market antenna go for $150,000. When you go to some of the mobility markets and the government markets and the enterprise markets, the pressure on having an antenna at the lowest possible cost is not as strong as it is in the consumer market. If you look at the technology today, I think there's no question we can build a phased array antenna at the low end, probably in the low $1,000 range. Nobody has figured out how to get it down to $100.
For the other markets, the technology is there for the price points that we need for those markets, for both the aeronautical, maritime, and the enterprise markets. I think we are now in a position that we'll have the right economics for those markets. It's probably a few years away from having the economics of the consumer market.
Okay. This is Charlie. I just had a couple things on OneWeb. One is we know that the technology works. We obviously have been heavily involved in the ground segment in terms of testing the current satellites that are up. While there's still a lot of technical things to do that we know the system as originally planned can work. Second thing, as it comes out of bankruptcy, you would expect that it comes out with a strong balance sheet, but also potentially, given the U.K. government's involvement, it potentially orders actually revenue. I'm not saying it will be as dramatic as this, but it's a little bit like Iridium, where they came out of bankruptcy and I believe they had orders from the Department of Defense, and that's a well-managed, a lot of value company.
They came out of bankruptcy at $50 million, and it's obviously worth several billion dollars now. Those opportunities exist, and OneWeb just needed to get over the hump. The second thing is that OneWeb remains having a high priority in the ITU for the use of thousands of gig of frequency, or megahertz of frequency. They're well-positioned from a regulatory point of view as a company that has, for lack of a better word, first in line from a regulatory position, as long as they can continue to launch more satellites. Which they'll be funded well enough to do today, and they already have launch contracts and so it's a matter of just building the satellites. There's a lot of potential positive with OneWeb. Still a long way for them to go, but they're in the right structure with the right partners moving forward.
Your next question comes from the line of Michael Rollins with Citi.
Hi, thanks for taking the questions. Two, if I could. First, as you think about the S-band spectrum holdings, is it more likely that you can create value from those holdings through an operating model that EchoStar controls or partners with? Is it more likely a monetization strategy of finding alternative purposes for that spectrum? For example, trying to push it to mobile or some other wireless service. Just taking a step back, as EchoStar as a company evaluates investments for the satellite business, for IoT, 5G, can you share with us how you're sizing the addressable revenue market, given that a lot of these services and applications don't really exist today? If you could share with us the framework and maybe some numbers that you're using for that would be great. Thanks.
Anders, you want to take that one?
On the S-band side, it's certainly early days. Right now our efforts are focused on getting our initial LEO satellites launched so as to crystallize our rights, which overlay the existing GEO rights. Once we have that in hand, as I mentioned in my comments, we're already in meaningful discussions with a number of potential customers that would, in essence, be anchor customers or partners in the development of a non-geostationary S-band service, which we intend, once the business plan makes sense, to invest in. I don't see us just monetizing the spectrum rights to third parties. I think I see us developing the MSS opportunity in some very unconventional ways, and then we have a second wave of development opportunity to the extent we then pursue the co-licensing of the use of the same spectrum terrestrially in areas where we don't already own that.
Your next question comes from the line of Kyle Davis with Cowen.
Hey, guys. I had two questions about the trends in the residential business. The first one was, I was wondering if you guys could quantify the Keep Americans Connected churn issue in the quarter and what you sort of expect for that in Q3 as the pledge has ended. The second question is, we have to make some assumptions around how much of the FX headwind held back the residential revenue increase. It does look to me like your residential revenue grew faster than your subscribers, which suggests to me an ARPU growth acceleration in the quarter, and I was wondering if you could talk about what may have driven that.
Yeah, I'll start and then Pradman can finish up a little bit. There's no question, certainly in North America, that the ARPU growth was significant in Q2. It grew over 5% from Q1 of 2020. The ARPU was certainly up, and that's really an indication, at least in part, of the higher utilization that customers had upgrading plans, buying additional capacity as they exceeded data caps. That's what drove that in part. The headwinds in South America are significant. Most of those are on the consumer side of the business. As we said, the $12 million revenue decline year-over-year as a result of those FX impacts. In terms of the number of subs in the Pledge, we're going to hold back on disclosing what that number is. Let's just say it's in the tens of thousands. I'll let Pradman address what he thinks happens to it going forward.
Yeah, I think the Pledge period has ended as of the end of June. We found that we've converted a reasonably big percentage of the customers that were in this bucket. We've converted them to regular subscribers, and they started paying their dues. I think in the 10-Q or something, we clearly pointed out that the subscribers that were in this Pledge bucket were counted as having churned out, so that caused our churn numbers to be slightly higher than what we had seen in the last couple of quarters. I think by converting them to paying customers, we should see that being recovered in the next few months as we go forward. All in all, this Pledge agreement that we signed with the government has not been harming our numbers significantly.
In any case, it's now done, and we are in normal mode at this stage.
Got it. That ARPU strength that you commented on, is that something you guys would guess persists into the back half of the year, or is it something that was particular to a lot of people being under stay-at-home orders in Q2, or do you think it's more persistent than that?
I'm sorry, that question was in relation to what?
The ARPU boost in North America that you commented on, David.
Yeah, I think we're going to have to see whether that continues. If people are still working from home, if there are still classrooms from home versus returning to schools. There's a lot of unknowns around COVID-19 and what the impact will be on the individuals, and more specifically, our customers in terms of their usage patterns, and that's going to have more societal impact as we go forward. It's tough to really forecast exactly what is going to happen in the usage going forward until we get more clarity on returning to work, returning to school, et cetera.
Got it. Thanks.
Your next question comes from the line of Brad Hathaway with Far View. Brad, your line is open.
Move to the next question.
You have a follow-up question from Ric Prentiss with Raymond James.
Thanks. Since we don't get Charlie again for another year, figured I'd throw a couple more at you, Charlie.
Hey, you can come on the DISH call tomorrow.
Exactly. Speaking of DISH, the quick easy one is, any other asset swaps envisioned between EchoStar and DISH in the short term? The more complicated question is, you were early and blunt on what the trends in pay TV were, and you were right. What do you think the trends are in consumer broadband? You mentioned that you think you can see the demand for JUPITER 3 , but as you look at the competitive dynamics of LEOs and fiber, how do you think about that demand curve and the ability to earn a return on JUPITER 3 over the long run?
Well, because we have a lot of control over North America, and b ecause a lot of the subscriber acquisition cost is already in place for our customers, and our customers are asking for just more capacity, the math on JUPITER 3 is good. Pradman's probably answered this better than I can, but it's comparable to what we've been able to earn on previous broadband satellites. We're confident that that's a good internal rate of return for us. The biggest one, two things are happening that would probably, if you look five years down the road and say where we might go, the government obviously is subsidizing with rural development funds, and we think that's only going to continue to grow regardless of who the next president of the United States is. We think that there'll be subsidization of rural broadband connectivity.
It's going to be like electricity was, at the turn of the century, where people had their electricity and ultimately became ubiquitous across the United States. Same thing's going to happen to broadband. Satellite will play a role there, but so will LEOs and MEOs, as well as GEOs, and so will terrestrial. I think that's a place that EchoStar can play to take what they do well with GEOs and continue to be on the forefront of that broadband connectivity, and they have the capital to go do that in the right spot. Obviously, two things, what does the cost of an antenna come down to? If you've got a LEO or a MEO, can that get low enough for consumers? Second, what is the government going to do in terms of subsidization?
They're well-positioned there, but you're certainly not going to go do things. There's also things like aeronautical and maritime that you're just not going to do any other way than through satellite and commercial. I think we do it like we always do. Look at the math and every investment we expect to get in return, and when in doubt, we don't do it. When we feel good about something and we feel like there's a vertical that we can go into and make money, then that's where we're going to go.
Great. That helps a lot. Thanks, Charlie.
By the way, I'd add to it, EchoStar, they are getting knowledge from the wireless side on the DISH side. DISH is seeing everything. There isn't anybody in the world in 5G architecture, new generation, how to build a network, that DISH isn't talking to at very high levels. DISH is seeing technology in the lab long before the consumer is going to see it. EchoStar, to the extent we can share information, one is privy to some of that. It helps them in knowing where things are going.
I think the decision-making process at EchoStar has an advantage in knowing a lot about where the terrestrial world's going to go, both in terms of developing products that will help the terrestrial world and staying away from products that might not be competitive given the long lead cycles of building satellites. I think they're uniquely positioned in that sense and perhaps more so than other companies.
No other asset transfers planned in the short term?
There might be some assets here or there, I think the material assets have been transferred.
Great. Thank you again.
Your next question comes from the line of Brad Hathaway with Far View.
Hi, guys. Sorry about a minute ago, and thanks for taking the question. Charlie, I just wanted to ask you a question about kind of bigger picture. When you think about larger M&A and the cost of your equity capital, how do you think about your share price as a potential asset? Does it kind of frustrate you that EchoStar doesn't seem to attract the same valuation as a lot of your peers? How do you think about maybe changing that perception going forward? Thank you.
I don't think it takes a great financial analyst to see that the EBITDA multiple at EchoStar is materially lower than some other companies, yet there's been a strong track record of performance at EchoStar. That would be disappointing, but for me, it's to challenge our management to show that they've got growth that can accelerate as opposed to plod along, even though it's plodding along at a high level, so that they actually justify a higher multiple. Clearly, even if you look at it today, the multiple seems to be a little low, but it's up to management to go out there and convince the market, to make sure they're in markets that have growth and convince the market that those are long-term sustaining growth things and they have the capital to do it, and they just need a challenge to do it.
When we get on this call, we get to talk to Pradman, and Mike, and Anders, and we'll whip them into shape a little bit. That's why I want to be on the call so that all you guys should be saying the same thing to our management.
No. Greatly appreciate your being on the call, because I think one of the overhangs has historically been concerns over long-term capital allocation, and so really appreciated some of your discussions about some of your long-term thoughts. Thanks, and again, congrats on the operational quarter and looking forward to seeing the strategy going forward.
Operator, I think we've got time for one more call.
Okay. Your final question comes from the line of Michael Rollins with Citi.
Oh, thanks. I just wanted to follow up on the second question that I had for Charlie. If you could talk a bit about as you're looking to invest in IoT and 5G with satellites, how you're sizing this market for revenue and opportunity, given that a lot of the applications and services don't exist in that form or that way today?
I don't think we have an exact size on the market. It's potentially very large. You certainly have billions of things that need to be connected that aren't in access of a terrestrial network or fiber. Certainly, you can think about maritime, and you can think about geography and how those things might want to connect. You can see Inmarsat and Iridium doing some of that today, ORBCOMM doing some of that today. You're starting to see the beginnings of that, but it's in the first inning of where that's going to go. The big picture is that it's billions of units, and even if you were making $1 a month of those connectivities, it's a huge market.
As you think about the kind of devices you could connect, you can imagine anything that's handheld, whether it be a phone or something else, you got billions of things that could connect. All you need is a fleet of satellites that cover the planet, that have a frequency that's low enough, that you have an omnidirectional antenna. You can imagine with low battery power for fixed devices, what that might be. That's an incredibly large business, assuming you could develop the right technology to do that. We don't see anything in the law of physics that would prevent an S-band frequency from doing that.
You might have regulatory from each country, you might have those kinds of issues, but there's nothing from the law of physics that would prevent people to be connected around the world with an omnidirectional antenna, which could be as simple as a chip in a device. It doesn't have the same kind of problems that we have with phased array antennas at the Ka-band frequencies. Different market, different application. That's what Anders is working on, and Anders is spending a lot of time on that with people. We have our own ideas, other people have ideas, and we think that's a potential big business for us, but we still get our first two satellites up, which is what we're costing. Hopefully when I call next quarter, we'll have the first two satellites up.
Thanks very much.
Okay, guys, we're out of time here, so we're ready to conclude the meeting. I'd like to thank everybody for calling in.
Ladies and gentlemen, this concludes today's conference call. I thank you for your participation. You may now disconnect.