JASON BOOTH
Staff Reporter
Hughes Electronics Corp. has officially joined the Internet revolution.
Last month’s announcement that America Online Inc. has invested $1.5 billion in Hughes is the strongest indicator yet that the El Segundo-based company has nearly completed its evolution from satellite manufacturer to more of a telecommunications firm with close Internet ties.
“We have talked for a long time about becoming interactive; this will get us there much more quickly,” said Hughes Chairman and Chief Executive Michael Smith. “It shows that satellites can compete in the Internet market.”
As a result of the deal, Hughes, for the first time, may be able to generate more revenues from its broadcasting operations than from its satellite manufacturing business.
For years, the company was valued by Wall Street as a defense play, or a higher-risk, higher-return tracking stock for General Motors Corp., which holds a nearly 60 percent stake. Now analysts will have to value Hughes as more of a growth-oriented telecom stock, with a good amount of Internet spice mixed in.
“I think this (AOL) deal was the inflection point where they became a business where the emphasis is on high growth rather than earnings,” said Vijay Jayant, an analyst at Bear, Stearns & Co.
So far, Wall Street appears to be happy with the new Hughes. Since the start of the year, the stock is up around 50 percent despite a somewhat choppy income statement.
On the day the AOL deal was announced, Hughes said that it expects to report a net loss of as much as 24 cents per share for the second quarter ended June 30. Analysts had been projecting a loss of only 4 cents per share.
But the short-term earnings problem, caused by start-up costs for DirecTV Japan and the firm’s international wireless telephone business, was more than offset by bullishness about the AOL deal.
For the year ended Dec. 31, 1998, Hughes posted net income of $250.7 million (68 cents per share), down from $449.7 million ($1.18) a year earlier. That drop came despite 1998 revenues of $5.96 billion, up from year-earlier revenues of $5.1 billion. Earnings for 1997 had been boosted by a one-time gain of $318 million resulting from Hughes’ merger with PanAmSat in that year.
With the conversion to telecommunications, analysts are starting to question whether Hughes has outgrown its ties to General Motors. They argue that Hughes has been kept on a fairly tight leash especially with regard to aggressive business strategies because its earnings have a direct impact on GM earnings.
“At this point (the relationship) is a negative,” said Cai von Rumohr at SG Cowen & Co. in Boston. “Valuations could be stronger without GM.”
He and other analysts argue that without constraints placed on it by GM, Hughes might have been more aggressive in expanding DirecTV, possibly through offering discounts to subscribers. While this proactive approach would have reduced earnings in the short term, it also would have helped the company beat out rivals such as EchoStar Communications Corp.
One alternative to breaking away from GM, analysts said, is for Hughes to just spin off DirecTV, while keeping the more-traditional satellite operations tied to GM.
But the satellite business is not very profitable these days, and the development of new products requires billions of dollars worth of research and development. Hughes is currently developing five new models of satellites.
The costs associated with such R & D; efforts were attributed as the cause for the steep losses expected for the second quarter.
It also is increasingly difficult to launch satellites after they are built. There is a years-long waiting list for launches from the United States and launches in other countries, especially China and Russia, are considered risky after several recent launches exploded.
At the same time, tensions between Washington and Beijing, greatly intensified over the recent discovery that U.S. nuclear secrets had been leaked to the Chinese, have made it next to impossible to launch Hughes-made satellites in China. “I can’t remember the last time we sold a satellite overseas,” said Smith.
He laid blame at Washington’s door. “At the end of the day it is a political problem more than a technology transfer problem,” Smith said. “The government is one day going to wake up and realize they are wrong.”
