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DISH NETWORK CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion and analysis of our financial condition
and results of operations together with the condensed consolidated financial
statements and notes to the financial statements included elsewhere in this
quarterly report. This management's discussion and analysis is intended to help
provide an understanding of our financial condition, changes in financial
condition and results of our operations and contains forward-looking statements
that involve risks and uncertainties. The forward-looking statements are not
historical facts, but rather are based on current expectations, estimates,
assumptions and projections about our industry, business and future financial
results. Our actual results could differ materially from the results
contemplated by these forward-looking statements due to a number of factors,
including those discussed in our Annual Report on Form 10-K for the year ended
December 31, 2011 and this Quarterly Report on Form 10-Q under the caption "Item
1A. Risk Factors."
EXECUTIVE SUMMARY
Overview
DISH added approximately 104,000 net subscribers during the three months ended
March 31, 2012, compared to approximately 58,000 net subscriber additions during
the same period in 2011. The increase versus the same period in 2011 primarily
resulted from a decrease in our churn rate. Our average monthly subscriber
churn rate for the three months ended March 31, 2012 was 1.35% compared to 1.47%
for the same period in 2011. During the three months ended March 31, 2012, DISH
added approximately 673,000 gross new subscribers compared to approximately
681,000 gross new subscribers during the same period in 2011, a decrease of
1.2%.
Our churn rate for the three months ended March 31, 2012 was positively impacted
versus the same period in 2011 because we did not have a programming package
price increase in the first quarter 2012, but did during the same period in
2011. While churn improved compared to the same period in 2011, increased
competitive pressures could increase churn in the future. Furthermore, our
churn has historically been lower in the first quarter. In addition to these
factors, our churn rate is impacted by, among other things, the credit quality
of previously acquired subscribers, our ability to consistently provide
outstanding customer service, and our ability to control piracy.
Our gross new subscriber activations continue to be negatively impacted by
increased competitive pressures, including aggressive marketing and discounted
promotional offers. In addition, telecommunications companies continue to grow
their customer bases. Our gross new subscriber activations continue to be
adversely affected by sustained economic weakness and uncertainty, including,
among other things, the weak housing market and lower discretionary spending.
"Net income (loss) attributable to DISH Network" for the three months ended
March 31, 2012 was $360 million compared to $549 million for the same period in
2011. During the three months ended March 31, 2012, "Net income (loss)
attributable to DISH Network" decreased primarily due to a reduction in our
accrued expenses related to the TiVo Inc. settlement during 2011, partially
offset by the non-cash gain during 2012 related to the conversion of our DBSD
North America 7.5% Convertible Senior Secured Notes due 2009 in connection with
the completion of the DBSD Transaction. See Note 8 in the Notes to the
Condensed Consolidated Financial Statements.
Programming costs represent a large percentage of our "Subscriber-related
expenses." Going forward, our margins may face pressure if we are unable to
renew our long-term programming contracts on favorable pricing and other
economic terms. Additionally, our gross new subscriber activations and
subscriber churn rate may be negatively impacted if we are unable to renew our
long-term programming contracts before they expire.
As the pay-TV industry matures, we and our competitors increasingly must seek to
attract a greater proportion of new subscribers from each other's existing
subscriber bases rather than from first-time purchasers of pay-TV services.
Some of our competitors have been especially aggressive by offering discounted
programming and services for both new and existing subscribers. In addition,
programming offered over the Internet has become more prevalent as the speed and
quality of broadband networks have improved. Significant changes in consumer
behavior with regard to the means by which they obtain video entertainment and
information in response to digital media competition could materially adversely
affect our business, results of operations and financial condition or otherwise
disrupt our business.
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While economic factors have impacted the entire pay-TV industry, our relative
performance has also been driven by issues specific to DISH. In the past, our
subscriber growth has been adversely affected by signal theft and other forms of
fraud and by operational inefficiencies at DISH. To combat signal theft and
improve the security of our broadcast system, we completed the replacement of
our security access devices to re-secure our system during 2009. We expect that
additional future replacements of these devices will be necessary to keep our
system secure. To combat other forms of fraud, we continue to expect that our
third party distributors and retailers will adhere to our business rules.
While we have made improvements in responding to and dealing with customer
service issues, we continue to focus on the prevention of these issues, which is
critical to our business, financial position and results of operations. We
implemented a new billing system as well as new sales and customer care systems
in the first quarter 2012. To improve our operational performance, we continue
to make significant investments in staffing, training, information systems, and
other initiatives, primarily in our call center and in-home service operations.
These investments are intended to help combat inefficiencies introduced by the
increasing complexity of our business, improve customer satisfaction, reduce
churn, increase productivity, and allow us to scale better over the long run.
We cannot, however, be certain that our spending will ultimately be successful
in improving our operational performance.
We have been deploying receivers that utilize 8PSK modulation technology and
receivers that utilize MPEG-4 compression technology for several years. These
technologies, when fully deployed, will allow more programming channels to be
carried over our existing satellites. Many of our customers today, however, do
not have receivers that use MPEG-4 compression and a smaller but still
significant percentage do not have receivers that use 8PSK modulation. We may
choose to invest significant capital to accelerate the conversion of customers
to MPEG-4 and/or 8PSK to realize the bandwidth benefits sooner. In addition,
given that all of our HD content is broadcast in MPEG-4, any growth in HD
penetration will naturally accelerate our transition to these newer technologies
and may increase our subscriber acquisition and retention costs. All new
receivers that we purchase from EchoStar have MPEG-4 technology. Although we
continue to refurbish and redeploy MPEG-2 receivers, as a result of our HD
initiatives and current promotions, we currently activate most new customers
with higher priced MPEG-4 technology. This limits our ability to redeploy
MPEG-2 receivers and, to the extent that our promotions are successful, will
accelerate the transition to MPEG-4 technology, resulting in an adverse effect
on our average subscriber acquisition costs per new subscriber activation.
From time to time, we change equipment for certain subscribers to make more
efficient use of transponder capacity in support of HD and other initiatives.
We believe that the benefit from the increase in available transponder capacity
outweighs the short-term cost of these equipment changes.
To maintain and enhance our competitiveness over the long term, we recently
introduced the Hopper™ receiver that allows, among other things, recorded
programming to be viewed in HD in multiple rooms. We are also promoting a suite
of integrated products designed to maximize the convenience and ease of watching
TV anytime and anywhere, which we refer to as TV Everywhere™ which utilizes,
among other things, online access and Slingbox "placeshifting" technology.
There can be no assurance that these integrated products will positively affect
our results of operations or our gross new subscriber activations.
Blockbuster
On April 26, 2011, we completed the Blockbuster Acquisition. We acquired
Blockbuster operations in the United States and in certain foreign countries.
Our winning bid in the bankruptcy court auction was valued at $321 million. We
paid $238 million, including $226 million in cash and $12 million in certain
assumed liabilities. Of the $226 million paid in cash, $20 million was placed
in escrow. Subsequent to this payment, we received a $4 million refund from
escrow, resulting in a net purchase price of $234 million. This transaction was
accounted for as a business combination and therefore the purchase price was
allocated to the assets acquired based on their estimated fair value. Since the
purchase prices of future inventory are expected to be higher than the fair
value of the inventory acquired, our cost of sales as a percentage of revenue
will be higher in the future.
Blockbuster primarily offers movies and video games for sale and rental through
multiple distribution channels such as retail stores, by-mail, digital devices,
the blockbuster.com website and the BLOCKBUSTER On Demand® service. The
Blockbuster Acquisition complements our core business of delivering high-quality
video entertainment
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to consumers. We are promoting our new Blockbuster offerings including the
Blockbuster@Home™ service which provides movies, games and TV shows through
Internet streaming, mail and in-store exchanges and online. This offering is
only available to DISH subscribers.
During the three months ended March 31, 2012, Blockbuster operations contributed
$334 million in revenue and $14 million in operating income. The operating
income during the three months ended March 31, 2012 was slightly higher than
recent quarters as we benefitted from the sale of inventory from domestic retail
stores that were closed in the first quarter 2012. In total, we closed
approximately 500 domestic stores during the three months ended March 31, 2012,
leaving us with approximately 1,000 domestic stores. We plan to close
approximately 100 additional domestic stores in the second quarter 2012. We
continue to evaluate the impact of certain factors, including, among other
things, competitive pressures, the scale of our Blockbuster retail operations
and other issues impacting the store-level financial performance of our
Blockbuster retail stores. These factors, or other reasons, could lead us to
close additional Blockbuster retail stores.
Wireless Spectrum
In 2008, we paid $712 million to acquire certain 700 MHz wireless spectrum
licenses, which were granted to us by the FCC in February 2009 subject to
certain build-out requirements. On March 9, 2012, we closed the acquisitions of
100% of the equity of reorganized DBSD North America, Inc. ("DBSD North
America") and substantially all of the assets of TerreStar Networks, Inc.
("TerreStar"), pursuant to which we acquired, among other things, certain
satellite assets and wireless spectrum licenses held by DBSD North America and
TerreStar. In addition, during the fourth quarter 2011, we and Sprint Nextel
Corporation ("Sprint") entered into a mutual release and settlement agreement
(the "Sprint Settlement Agreement") pursuant to which all disputed issues
relating to the acquisitions of DBSD North America and TerreStar were resolved
between us and Sprint, including, but not limited to, issues relating to costs
allegedly incurred by Sprint to relocate users from the spectrum then licensed
to DBSD North America and TerreStar. The total consideration to acquire these
assets was approximately $2.860 billion. This amount includes $1.364 billion
for DBSD North America (the "DBSD Transaction"), $1.382 billion for TerreStar
(the "TerreStar Transaction"), and the net payment of $114 million to Sprint
pursuant to the Sprint Settlement Agreement. The financial results of DBSD
North America and TerreStar were included in our results as of March 9, 2012.
We generated less than $1 million of revenue and incurred $8 million in
operating expenses for the three months ended March 31, 2012 from our wireless
spectrum assets. We incurred general and administrative expenses associated
with certain satellite operations and regulatory compliance from our wireless
spectrum assets. We also incurred depreciation and amortization expenses
associated with certain assets of DBSD North America and TerreStar. This
depreciation and amortization expense is based on our initial estimate of the
fair value of these assets as disclosed in Note 8 in the Notes to the Condensed
Consolidated Financial Statements. As we review our options for the
commercialization of this wireless spectrum, we may incur significant additional
expenses and may have to make significant investments related to, among other
things, research and development, wireless testing and construction of a
wireless network.
Operational Liquidity
Like many companies, we make general investments in property such as satellites,
set-top boxes, information technology and facilities that support our overall
business. As a subscriber-based company, however, we also make
subscriber-specific investments to acquire new subscribers and retain existing
subscribers. While the general investments may be deferred without impacting
the business in the short-term, the subscriber-specific investments are less
discretionary. Our overall objective is to generate sufficient cash flow over
the life of each subscriber to provide an adequate return against the upfront
investment. Once the upfront investment has been made for each subscriber, the
subsequent cash flow is generally positive.
There are a number of factors that impact our future cash flow compared to the
cash flow we generate at a given point in time. The first factor is how
successful we are at retaining our current subscribers. As we lose subscribers
from our existing base, the positive cash flow from that base is correspondingly
reduced. The second factor is how successful we are at maintaining our
subscriber-related margins. To the extent our "Subscriber-related expenses"
grow faster than our "Subscriber-related revenue," the amount of cash flow that
is generated per existing subscriber
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is reduced. The third factor is the rate at which we acquire new subscribers.
The faster we acquire new subscribers, the more our positive ongoing cash flow
from existing subscribers is offset by the negative upfront cash flow associated
with new subscribers. Finally, our future cash flow is impacted by the rate at
which we make general investments and any cash flow from financing activities.
Our subscriber-specific investments to acquire new subscribers have a
significant impact on our cash flow. While fewer subscribers might translate
into lower ongoing cash flow in the long-term, cash flow is actually aided, in
the short-term, by the reduction in subscriber-specific investment spending. As
a result, a slow down in our business due to external or internal factors does
not introduce the same level of short-term liquidity risk as it might in other
industries.
Availability of Credit and Effect on Liquidity
The ability to raise capital has generally existed for us despite the weak
economic conditions. Modest fluctuations in the cost of capital will not likely
impact our current operational plans.
Future Liquidity
Wireless Spectrum
In 2008, we paid $712 million to acquire certain 700 MHz wireless spectrum
licenses, which were granted to us by the FCC in February 2009 subject to
certain build-out requirements. To commercialize these licenses and satisfy the
associated FCC build-out requirements, we will be required to make significant
additional investments or partner with others to, among other things, finance
the commercialization and build-out requirements of these licenses and our
integration efforts including compliance with regulations applicable to these
licenses. Depending on the nature and scope of such commercialization and
build-out, any such investment or partnership could vary significantly, which
may affect our future financial condition or results of operations. Part or all
of these licenses may be terminated if the associated FCC build-out requirements
are not satisfied. There can be no assurance that we will be able to develop
and implement a business model that will realize a return on these investments
and profitably deploy the spectrum represented by the 700 MHz licenses.
On March 2, 2012, the FCC approved the transfer of 40 MHz of 2 GHz wireless
spectrum licenses held by DBSD North America and TerreStar to us. On March 9,
2012, we closed the DBSD Transaction and the TerreStar Transaction, pursuant to
which we acquired, among other things, certain satellite assets and wireless
spectrum licenses held by DBSD North America and TerreStar. The total
consideration to acquire these assets was approximately $2.860 billion. This
amount includes $1.364 billion for the DBSD Transaction, $1.382 billion for the
TerreStar Transaction, and the net payment of $114 million to Sprint pursuant to
the Sprint Settlement Agreement.
Our consolidated FCC applications for approval of the license transfers from
DBSD North America and TerreStar were accompanied by requests for waiver of the
FCC's Mobile Satellite Service ("MSS") "integrated service" and spare satellite
requirements and various technical provisions. The FCC denied our requests for
waiver of the integrated service and spare satellite requirements. The FCC has
not yet acted on the request for waiver of various technical provisions, and we
cannot predict the outcome or timing of any action by the FCC with respect to
that waiver request. Waiver of the integrated service requirement would have
allowed us to offer single-mode terrestrial terminals to customers who do not
desire satellite functionality. On March 21, 2012, the FCC released a notice of
proposed rule making ("NPRM") that could result in the elimination of the
integrated service and other requirements that attach to the 2 GHz licenses.
Among other things, the FCC has proposed to modify our licenses to allow us to
offer single-mode terrestrial terminals to customers who do not desire satellite
functionality. The NPRM was published in the Federal Register on April 17,
2012. Initial comments on the NPRM are due on or before May 17, 2012, and reply
comments are due on or before June 1, 2012. While the FCC has indicated its
intent to complete the NPRM during 2012, we cannot predict the outcome or timing
of the NPRM, including, without limitation, any associated build-out
requirements with which we may need to comply to avail ourselves of any changes
to the rules.
As a result of the completion of the DBSD Transaction and the TerreStar
Transaction, we will likely be required to make significant additional
investments or partner with others to, among other things, finance the
commercialization and build-out requirements of these licenses and our
integration efforts including compliance with regulations
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applicable to the acquired licenses. Depending on the nature and scope of such
commercialization and build-out, any such investment or partnership could vary
significantly. There can be no assurance that we will be able to develop and
implement a business model that will realize a return on these spectrum
investments or that we will be able to profitably deploy the assets represented
by these spectrum investments, which may affect the carrying value of these
assets and our future financial condition or results of operations.
Voom HD Holdings
If Voom HD Holdings ("Voom") prevails in its breach of contract suit against us,
we could be required to pay substantial damages, which would have a material
adverse affect on our financial position and results of operations. In
January 2008, Voom filed a lawsuit against our wholly-owned subsidiary, DISH
Network L.L.C., in New York Supreme Court, alleging breach of contract and other
claims arising from our termination of the affiliation agreement governing
carriage of certain Voom HD channels on the DISH branded pay-TV service At that
time, Voom also sought a preliminary injunction to prevent us from terminating
the agreement. The Court denied Voom's request, finding, among other things,
that Voom had not demonstrated that it was likely to prevail on the merits. In
April 2010, we and Voom each filed motions for summary judgment. Voom later
filed two motions seeking discovery sanctions. On November 9, 2010, the Court
issued a decision denying both motions for summary judgment, but granting Voom's
motions for discovery sanctions. The Court's decision provides for an adverse
inference jury instruction at trial and precludes our damages expert from
testifying at trial. We appealed the grant of Voom's motion for discovery
sanctions to the New York State Supreme Court, Appellate Division, First
Department. On February 15, 2011, the appellate court granted our motion to
stay the trial pending our appeal. On January 31, 2012, the appellate court
affirmed the order imposing discovery sanctions and precluding our damages
expert from testifying at trial. We sought leave to appeal to New York's
highest state court, the Court of Appeals, but that motion was denied on
April 26, 2012. A trial date has not been set. Voom is claiming over $2.5
billion in damages.
EXPLANATION OF KEY METRICS AND OTHER ITEMS
Subscriber-related revenue. "Subscriber-related revenue" consists principally
of revenue from basic, premium movie, local, HD programming, pay-per-view,
Latino and international subscription television services, equipment rental fees
and other hardware related fees, including fees for DVRs, equipment upgrade fees
and additional outlet fees from subscribers with receivers with multiple tuners,
advertising services, fees earned from our in-home service operations and other
subscriber revenue. Certain of the amounts included in "Subscriber-related
revenue" are not recurring on a monthly basis.
Equipment and merchandise sales, rental and other revenue. "Equipment and
merchandise sales, rental and other revenue" principally includes the
non-subsidized sales of DBS accessories to retailers and other third-party
distributors of our equipment domestically and to DISH subscribers. Effective
April 26, 2011, revenue from merchandise sold to customers including movies,
video games and other items, and revenue from the rental of movies and video
games and the sale of previously rented titles related to our Blockbuster
operations are included in this category. Effective March 9, 2012, revenue
related to our wireless spectrum operations is included in this category.
Equipment sales, services and other revenue - EchoStar. "Equipment sales,
services and other revenue - EchoStar" includes revenue related to equipment
sales, services, and other agreements with EchoStar.
Subscriber-related expenses. "Subscriber-related expenses" principally include
programming expenses, which represent a substantial majority of these expenses.
"Subscriber-related expenses" also include costs incurred in connection with our
in-home service and call center operations, billing costs, refurbishment and
repair costs related to receiver systems, subscriber retention and other
variable subscriber expenses.
Satellite and transmission expenses - EchoStar. "Satellite and transmission
expenses - EchoStar" includes the cost of leasing satellite and transponder
capacity from EchoStar and the cost of digital broadcast operations provided to
us by EchoStar, including satellite uplinking/downlinking, signal processing,
conditional access management, telemetry, tracking and control, and other
professional services.
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Satellite and transmission expenses - other. "Satellite and transmission
expenses - other" includes executory costs associated with capital leases and
costs associated with transponder leases and other related services. Effective
March 9, 2012, expenses related to our wireless spectrum operations are included
in this category.
Cost of sales - equipment, merchandise, services, rental and other. "Cost of
sales - equipment, merchandise, services, rental and other" principally includes
the cost of non-subsidized sales of DBS accessories to retailers and other
third-party distributors of our equipment domestically and to DISH subscribers.
Effective April 26, 2011, the cost of movies and video games including rental
title purchases or revenue sharing to studios, packaging and online delivery
costs and cost of merchandise sold including movies, video games and other items
related to our Blockbuster operations are included in this category. In
addition, "Cost of sales - equipment, merchandise, services, rental and other"
includes costs related to equipment sales, services, and other agreements with
EchoStar.
Subscriber acquisition costs. In addition to leasing receivers, we generally
subsidize installation and all or a portion of the cost of our receiver systems
to attract new DISH subscribers. Our "Subscriber acquisition costs" include the
cost of subsidized sales of receiver systems to retailers and other third-party
distributors of our equipment, the cost of subsidized sales of receiver systems
directly by us to subscribers, including net costs related to our promotional
incentives, costs related to our direct sales efforts and costs related to
installation and acquisition advertising. We exclude the value of equipment
capitalized under our lease program for new subscribers from "Subscriber
acquisition costs."
SAC. Subscriber acquisition cost measures are commonly used by those evaluating
companies in the pay-TV industry. We are not aware of any uniform standards for
calculating the "average subscriber acquisition costs per new subscriber
activation," or SAC, and we believe presentations of SAC may not be calculated
consistently by different companies in the same or similar businesses. Our SAC
is calculated as "Subscriber acquisition costs," plus the value of equipment
capitalized under our lease program for new subscribers, divided by gross new
subscriber activations. We include all the costs of acquiring subscribers
(e.g., subsidized and capitalized equipment) as we believe it is a more
comprehensive measure of how much we are spending to acquire subscribers. We
also include all new DISH subscribers in our calculation, including DISH
subscribers added with little or no subscriber acquisition costs.
General and administrative expenses. "General and administrative expenses"
consists primarily of employee-related costs associated with administrative
services such as legal, information systems, accounting and finance, including
non-cash, stock-based compensation expense. It also includes outside
professional fees (e.g., legal, information systems and accounting services) and
other items associated with facilities and administration.
Litigation expense. "Litigation expense" primarily consists of legal
settlements, judgments or accruals associated with certain significant
litigation.
Interest expense, net of amounts capitalized. "Interest expense, net of amounts
capitalized" primarily includes interest expense, prepayment premiums and
amortization of debt issuance costs associated with our senior debt (net of
capitalized interest), and interest expense associated with our capital lease
obligations.
Other, net. The main components of "Other, net" are gains and losses realized
on the sale of investments, impairment of marketable and non-marketable
investment securities, unrealized gains and losses from changes in fair value of
marketable and non-marketable strategic investments accounted for at fair value,
and equity in earnings and losses of our affiliates.
Earnings before interest, taxes, depreciation and amortization ("EBITDA").
EBITDA is defined as "Net income (loss) attributable to DISH Network" plus
"Interest expense, net of amounts capitalized" net of "Interest income," "Taxes"
and "Depreciation and amortization." This "non-GAAP measure" is reconciled to
"Net income (loss) attributable to DISH Network" in our discussion of "Results
of Operations" below.
DISH subscribers. We include customers obtained through direct sales,
third-party retailers and other third-party distribution relationships in our
DISH subscriber count. We also provide DISH service to hotels, motels and other
commercial accounts. For certain of these commercial accounts, we divide our
total revenue for these commercial accounts by an amount approximately equal to
the retail price of our DISH America programming package, and
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include the resulting number, which is substantially smaller than the actual
number of commercial units served, in our DISH subscriber count. Effective
during the first quarter 2011, we made two changes to this calculation
methodology compared to prior periods. Beginning February 1, 2011, the retail
price of our DISH America programming package was used in the calculation rather
than America's Top 120 programming package, which had been used in prior
periods. We also determined that two of our commercial business lines, which
had previously been included in the described calculation, could be more
accurately reflected through actual subscriber counts. The net impact of these
two changes was to increase our subscriber count by approximately 6,000
subscribers in the first quarter 2011. Prior period DISH subscriber counts have
not been adjusted for this revised commercial accounts calculation as the
impacts were immaterial.
Average monthly revenue per subscriber. We are not aware of any uniform
standards for calculating ARPU and believe presentations of ARPU may not be
calculated consistently by other companies in the same or similar businesses.
We calculate average monthly revenue per subscriber, or ARPU, by dividing
average monthly "Subscriber-related revenue" for the period (total
"Subscriber-related revenue" during the period divided by the number of months
in the period) by our average number of DISH subscribers for the period. The
average number of DISH subscribers is calculated for the period by adding the
average number of DISH subscribers for each month and dividing by the number of
months in the period. The average number of DISH subscribers for each month is
calculated by adding the beginning and ending DISH subscribers for the month and
dividing by two.
Average monthly subscriber churn rate. We are not aware of any uniform
standards for calculating subscriber churn rate and believe presentations of
subscriber churn rates may not be calculated consistently by different companies
in the same or similar businesses. We calculate subscriber churn rate for any
period by dividing the number of DISH subscribers who terminated service during
the period by the average number of DISH subscribers for the same period, and
further dividing by the number of months in the period. When calculating
subscriber churn, the same methodology for calculating average number of DISH
subscribers is used as when calculating ARPU.
Free cash flow. We define free cash flow as "Net cash flows from operating
activities" less "Purchases of property and equipment," as shown on our
Condensed Consolidated Statements of Cash Flows.
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RESULTS OF OPERATIONS
Three Months Ended March 31, 2012 Compared to the Three Months Ended March 31,
2011.
For the Three Months
Ended March 31, Variance
Statements of Operations Data 2012 2011 Amount %
(In thousands)
Revenue:
Subscriber-related revenue $ 3,224,465 $ 3,199,099 $ 25,366 0.8
Equipment and merchandise sales,
rental and other revenue 350,737 16,001 334,736 NM
Equipment sales, services and
other revenue - EchoStar 6,667 9,031 (2,364 ) (26.2 )
Total revenue 3,581,869 3,224,131 357,738 11.1
Costs and Expenses:
Subscriber-related expenses 1,762,753 1,693,695 69,058 4.1
% of Subscriber-related revenue 54.7 % 52.9 %
Satellite and transmission
expenses - EchoStar 109,854 108,913 941 0.9
% of Subscriber-related revenue 3.4 % 3.4 %
Satellite and transmission
expenses - Other 11,679 10,200 1,479 14.5
% of Subscriber-related revenue 0.4 % 0.3 %
Cost of sales - equipment,
merchandise, services, rental and
other 142,262 22,267 119,995 NM
Subscriber acquisition costs 398,037 354,899 43,138 12.2
General and administrative
expenses 376,175 161,784 214,391 NM
% of Total revenue 10.5 % 5.0 %
Litigation expense - (340,677 ) 340,677 100.0
Depreciation and amortization 208,698 229,697 (20,999 ) (9.1 )
Total costs and expenses 3,009,458 2,240,778 768,680 34.3
Operating income (loss) 572,411 983,353 (410,942 ) (41.8 )
Other Income (Expense):
Interest income 7,089 6,286 803 12.8
Interest expense, net of amounts
capitalized (138,013 ) (120,179 ) (17,834 ) (14.8 )
Other, net 110,282 11,633 98,649 NM
Total other income (expense) (20,642 ) (102,260 ) 81,618 79.8
Income (loss) before income taxes 551,769 881,093 (329,324 ) (37.4 )
Income tax (provision) benefit,
net
(191,643 ) (331,767 ) 140,124 42.2
Effective tax rate 34.7 % 37.7 %
Net income (loss) 360,126 549,326 (189,200 ) (34.4 )
Less: Net income (loss)
attributable to noncontrolling
interest (184 ) (68 ) (116 ) NM
Net income (loss) attributable to
DISH Network $ 360,310 $ 549,394 $ (189,084 ) (34.4 )
Other Data:
DISH Network subscribers, as of
period end (in millions) 14.071 14.191 (0.120 ) (0.8 )
DISH Network subscriber additions,
gross (in millions) 0.673 0.681 (0.008 ) (1.2 )
DISH Network subscriber additions,
net (in millions) 0.104 0.058 0.046 79.3
Average monthly subscriber churn
rate 1.35 % 1.47 % (0.12 )% (8.2 )
Average monthly revenue per
subscriber ("ARPU") $ 76.71 $ 75.39 $ 1.32 1.8
Average subscriber acquisition
cost per subscriber ("SAC") $ 751 $ 725 $ 26 3.6
EBITDA $ 891,575 $ 1,224,751 $ (333,176 ) (27.2 )
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
DISH subscribers. DISH added approximately 104,000 net subscribers during the
three months ended March 31, 2012, compared to approximately 58,000 net
subscriber additions during the same period in 2011. The increase versus the
same period in 2011 primarily resulted from a decrease in our churn rate. Our
average monthly subscriber churn rate for the three months ended March 31, 2012
was 1.35% compared to 1.47% for the same period in 2011. During the three
months ended March 31, 2012, DISH added approximately 673,000 gross new
subscribers compared to approximately 681,000 gross new subscribers during the
same period in 2011, a decrease of 1.2%.
Our churn rate for the three months ended March 31, 2012 was positively impacted
versus the same period in 2011 because we did not have a programming package
price increase in the first quarter 2012, but did during the same period in
2011. While churn improved compared to the same period in 2011, increased
competitive pressures could increase churn in the future. Furthermore, our
churn has historically been lower in the first quarter. In addition to these
factors, our churn rate is impacted by the credit quality of previously acquired
subscribers, our ability to consistently provide outstanding customer service,
and our ability to control piracy.
Our gross new subscriber activations continue to be negatively impacted by
increased competitive pressures, including aggressive marketing and discounted
promotional offers. In addition, telecommunications companies continue to grow
their customer bases. Our gross new subscriber activations continue to be
adversely affected by sustained economic weakness and uncertainty, including,
among other things, the weak housing market and lower discretionary spending.
We have not always met our own standards for performing high-quality
installations, effectively resolving subscriber issues when they arise,
answering subscriber calls in an acceptable timeframe, effectively communicating
with our subscriber base, reducing calls driven by the complexity of our
business, improving the reliability of certain systems and subscriber equipment,
and aligning the interests of certain third party retailers and installers to
provide high-quality service. Most of these factors have affected both gross
new subscriber activations as well as existing subscriber churn. Our future
gross new subscriber activations and subscriber churn may be negatively impacted
by these factors, which could in turn adversely affect our revenue growth.
Subscriber-related revenue. DISH "Subscriber-related revenue" totaled $3.224
billion for the three months ended March 31, 2012, an increase of $25 million or
0.8% compared to the same period in 2011. This change was primarily related to
the increase in "ARPU" discussed below.
ARPU. "Average monthly revenue per subscriber" was $76.71 during the three
months ended March 31, 2012 versus $75.39 during the same period in 2011. The
$1.32 or 1.8% increase in ARPU was primarily attributable to our price increase
in February 2011 and higher hardware related revenue, partially offset by
decreases in premium and pay per view revenue.
Equipment and merchandise sales, rental and other revenue. "Equipment and
merchandise sales, rental and other revenue" totaled $351 million for the three
months ended March 31, 2012, an increase of $335 million compared to the same
period in 2011. This increase was primarily driven by revenue from the rental
of movies and video games, the sale of previously rented titles, and other
merchandise sold to customers including movies, video games and other items
related to our Blockbuster operations which are included in our financial
results beginning April 26, 2011.
Subscriber-related expenses. "Subscriber-related expenses" totaled $1.763
billion during the three months ended March 31, 2012, an increase of $69 million
or 4.1% compared to the same period in 2011. The increase in
"Subscriber-related expenses" was primarily attributable to higher programming
costs, partially offset by a decrease in customer retention expense. The
increase in programming costs was driven by rate increases in certain of our
programming contracts, including the renewal of certain contracts at higher
rates. "Subscriber-related expenses" represented 54.7% and 52.9% of
"Subscriber-related revenue" during the three months ended March 31, 2012 and
2011, respectively. The change in this expense to revenue ratio primarily
resulted from higher programming costs, discussed above.
In the normal course of business, we enter into contracts to purchase
programming content in which our payment obligations are fully contingent on the
number of subscribers to whom we provide the respective content. Our
programming expenses will continue to increase to the extent we are successful
in growing our subscriber base. In
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
addition, our "Subscriber-related expenses" may face further upward pressure
from price increases and the renewal of long-term programming contracts on less
favorable pricing terms.
Cost of sales - equipment, merchandise, services, rental and other. "Cost of
sales - equipment, merchandise, services, rental and other" totaled $142 million
for the three months ended March 31, 2012, an increase of $120 million compared
to the same period in 2011. This increase is primarily associated with the cost
of rental title purchases or revenue sharing to studios, packaging and on-line
delivery costs as well as the cost of merchandise sold such as movies, video
games and other items related to our Blockbuster operations which are included
in our financial results beginning April 26, 2011.
Subscriber acquisition costs. "Subscriber acquisition costs" totaled $398
million for the three months ended March 31, 2012, an increase of $43 million or
12.2% compared to the same period in 2011. This increase was primarily
attributable to an increase in SAC described below.
SAC. SAC was $751 during the three months ended March 31, 2012 compared to $725
during the same period in 2011, an increase of $26 or 3.6%. This increase was
primarily attributable to higher acquisition advertising expenses.
During the three months ended March 31, 2012 and 2011, the amount of equipment
capitalized under our lease program for new subscribers totaled $107 million and
$139 million, respectively. This decrease in capital expenditures under our
lease program for new subscribers resulted primarily from an increase in the
percentage of redeployed receivers that were installed. To remain competitive
we upgrade or replace subscriber equipment periodically as technology changes,
and the costs associated with these upgrades may be substantial. To the extent
technological changes render a portion of our existing equipment obsolete, we
would be unable to redeploy all returned equipment and consequently would
realize less benefit from the SAC reduction associated with redeployment of that
returned lease equipment.
Our SAC calculation does not reflect any benefit from payments we received in
connection with equipment not returned to us from disconnecting lease
subscribers and returned equipment that is made available for sale or used in
our existing customer lease program rather than being redeployed through our new
customer lease program. During the three months ended March 31, 2012 and 2011,
these amounts totaled $30 million and $21 million, respectively.
We have been deploying receivers that utilize 8PSK modulation technology and
receivers that utilize MPEG-4 compression technology for several years. These
technologies, when fully deployed, will allow more programming channels to be
carried over our existing satellites. Many of our customers today, however, do
not have receivers that use MPEG-4 compression and a smaller but still
significant percentage do not have receivers that use 8PSK modulation. We may
choose to invest significant capital to accelerate the conversion of customers
to MPEG-4 and/or 8PSK to realize the bandwidth benefits sooner. In addition,
given that all of our HD content is broadcast in MPEG-4, any growth in HD
penetration will naturally accelerate our transition to these newer technologies
and may increase our subscriber acquisition and retention costs. All new
receivers that we purchase from EchoStar have MPEG-4 technology. Although we
continue to refurbish and redeploy MPEG-2 receivers, as a result of our HD
initiatives and current promotions, we currently activate most new customers
with higher priced MPEG-4 technology. This limits our ability to redeploy
MPEG-2 receivers and, to the extent that our promotions are successful, will
accelerate the transition to MPEG-4 technology, resulting in an adverse effect
on our SAC.
Our "Subscriber acquisition costs" and "SAC" may materially increase in the
future to the extent that we transition to newer technologies, introduce more
aggressive promotions, or provide greater equipment subsidies. See further
discussion under "Liquidity and Capital Resources - Subscriber Acquisition and
Retention Costs."
General and administrative expenses. "General and administrative expenses"
totaled $376 million during the three months ended March 31, 2012, a $214
million increase compared to the same period in 2011. This increase was
primarily due to an increase in personnel, building and maintenance and other
administrative costs associated with our Blockbuster operations which are
included in our financial results beginning April 26, 2011.
Litigation expense. "Litigation expense" totaled zero during the three months
ended March 31, 2012. During the three months ended March 31, 2011, we reversed
$341 million related to the April 29, 2011 settlement agreement with TiVo, which
was previously recorded as an expense. See Note 13 for further discussion.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
Depreciation and amortization. "Depreciation and amortization" expense totaled
$209 million during the three months ended March 31, 2012, a $21 million or 9.1%
decrease compared to the same period in 2011. This change in "Depreciation and
amortization" expense was primarily due to a decrease in depreciation on
equipment leased to subscribers principally related to less equipment
capitalization during the preceding 12 months and less equipment write-offs from
disconnecting subscribers.
Interest expense, net of amounts capitalized. "Interest expense, net of amounts
capitalized" totaled $138 million during the three months ended March 31, 2012,
an increase of $18 million or 14.8% compared to the same period in 2011. This
change primarily resulted from an increase in interest expense related to the
issuance of our 6 3/4% Senior Notes due 2021 during the second quarter 2011,
partially offset by a decrease in interest expense as a result of the
repurchases and redemptions in 2011 of our 6 3/8% Senior Notes due 2011.
Other, net. "Other, net" income totaled $110 million during the three months
ended March 31, 2012, an increase of $99 million compared to the same period in
2011. This increase resulted from a $99 million non-cash gain related to the
conversion of our DBSD North America 7.5% Convertible Senior Secured Notes due
2009 in connection with the completion of the DBSD Transaction. See Note 8 in
the Notes to the Condensed Consolidated Financial Statements.
Earnings before interest, taxes, depreciation and amortization. EBITDA was $892
million during the three months ended March 31, 2012, a decrease of $333 million
or 27.2% compared to the same period in 2011. EBITDA for the three months ended
March 31, 2011 was favorably impacted by the reversal of $341 million of
"Litigation expense" related to the April 29, 2011 settlement agreement with
TiVo, which had been previously recorded as an expense prior to the first
quarter 2011. EBITDA for the three months ended March 31, 2012 was impacted by a
$99 million non-cash gain related to the conversion of our DBSD North America
7.5% Convertible Senior Secured Notes due 2009 in connection with the completion
of the DBSD Transaction. The following table reconciles EBITDA to the
accompanying financial statements.
For the Three Months
Ended March 31,
2012 2011
(In thousands)
EBITDA $ 891,575 $ 1,224,751
Interest expense, net (130,924 ) (113,893 )
Income tax (provision) benefit, net (191,643 ) (331,767 )
Depreciation and amortization (208,698 ) (229,697 )
Net income (loss) attributable to DISH Network $ 360,310 $ 549,394
EBITDA is not a measure determined in accordance with accounting principles
generally accepted in the United States ("GAAP") and should not be considered a
substitute for operating income, net income or any other measure determined in
accordance with GAAP. EBITDA is used as a measurement of operating efficiency
and overall financial performance and we believe it to be a helpful measure for
those evaluating companies in the pay-TV industry. Conceptually, EBITDA
measures the amount of income generated each period that could be used to
service debt, pay taxes and fund capital expenditures. EBITDA should not be
considered in isolation or as a substitute for measures of performance prepared
in accordance with GAAP.
Income tax (provision) benefit, net. Our income tax provision was $192 million
during the three months ended March 31, 2012, a decrease of $140 million
compared to the same period in 2011. The decrease in the provision was
primarily related to the decrease in "Income (loss) before income taxes" and a
decrease in our effective tax rate. Our effective tax rate was positively
impacted by the change in our valuation allowances against certain deferred tax
assets that are capital in nature.
Net income (loss) attributable to DISH Network. "Net income (loss) attributable
to DISH Network" was $360 million during the three months ended March 31, 2012,
a decrease of $189 million compared to $549 million for the same period in
2011. This decrease was primarily attributable to the changes in revenue and
expenses discussed above.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
LIQUIDITY AND CAPITAL RESOURCES
Cash, Cash Equivalents and Current Marketable Investment Securities
We consider all liquid investments purchased within 90 days of their maturity to
be cash equivalents. See "Item 3. - Quantitative and Qualitative Disclosures
About Market Risk" for further discussion regarding our marketable investment
securities. As of March 31, 2012, our cash, cash equivalents and current
marketable investment securities totaled $2.693 billion compared to $2.041
billion as of December 31, 2011, an increase of $652 million. This increase in
cash, cash equivalents and current marketable investment securities was
primarily related to cash generated from operations of $859 million and net
sales of marketable investment securities of $139 million, partially offset by
capital expenditures of $169 million, net payments in connection with the DBSD
Transaction of $40 million, payments in connection with the TerreStar
Transaction of $37 million, and other changes in working capital.
We have investments in various debt and equity instruments including corporate
bonds, corporate equity securities, government bonds and variable rate demand
notes ("VRDNs"). VRDNs are long-term floating rate municipal bonds with
embedded put options that allow the bondholder to sell the security at par plus
accrued interest. All of the put options are secured by a pledged liquidity
source. Our VRDN portfolio is comprised of investments in many municipalities,
which are backed by financial institutions or other highly rated companies that
serve as the pledged liquidity source. While they are classified as marketable
investment securities, the put option allows VRDNs to be liquidated generally on
a same day or on a five business day settlement basis. As of March 31, 2012 and
December 31, 2011, we held VRDNs, within our current marketable investment
securities portfolio, with fair values of $185 million and $161 million,
respectively.
The following discussion highlights our cash flow activities during the three
months ended March 31, 2012.
Cash Flow
Cash flows from operating activities
For the three months ended March 31, 2012, we reported "Net cash flows from
operating activities" of $859 million primarily attributable to $459 million of
net income adjusted to exclude non-cash charges for "Depreciation and
amortization" expense and "Realized and unrealized losses (gains) on
investments," as well as changes in operating assets and liabilities related to
timing differences between book expense and cash payments.
On December 17, 2010, the Tax Relief, Unemployment Insurance Reauthorization and
Job Creation Act of 2010 was enacted, which provides for a bonus depreciation
deduction of 100% of the cost of our qualified capital expenditures from
September 8, 2010 through December 31, 2011. Our "Deferred income tax expense
(benefit)" for the three months ended March 31, 2011 was positively impacted by
the 100% bonus depreciation deduction in 2011. In 2012, the bonus depreciation
deduction was lowered to 50% of the cost of our qualified capital expenditures.
Cash flows from investing activities
For the three months ended March 31, 2012, we reported net cash outflows from
investing activities of $109 million primarily related to capital expenditures
of $169 million, purchases of strategic investments of $77 million, partially
offset by net sales of marketable investment securities of $139 million. The
capital expenditures included $150 million associated with our subscriber
acquisition and retention lease programs, and $19 million of other corporate
capital expenditures. The purchases of strategic investments included net
payments in connection with the DBSD Transaction of $40 million, and the
TerreStar Transaction of $37 million.
Cash flows from financing activities
For the three months ended March 31, 2012, we reported net cash outflows from
financing activities of $2 million primarily related to debt repayments of $8
million, partially offset by stock options exercises.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
Free Cash Flow
We define free cash flow as "Net cash flows from operating activities" less
"Purchases of property and equipment," as shown on our Condensed Consolidated
Statements of Cash Flows. We believe free cash flow is an important liquidity
metric because it measures, during a given period, the amount of cash generated
that is available to repay debt obligations, make investments, fund acquisitions
and for certain other activities. Free cash flow is not a measure determined in
accordance with GAAP and should not be considered a substitute for "Operating
income," "Net income," "Net cash flows from operating activities" or any other
measure determined in accordance with GAAP. Since free cash flow includes
investments in operating assets, we believe this non-GAAP liquidity measure is
useful in addition to the most directly comparable GAAP measure "Net cash flows
from operating activities."
During the three months ended March 31, 2012 and 2011, free cash flow was
significantly impacted by changes in operating assets and liabilities and in
"Purchases of property and equipment" as shown in the "Net cash flows from
operating activities" and "Net cash flows from investing" sections,
respectively, of our Condensed Consolidated Statements of Cash Flows included
herein. Operating asset and liability balances can fluctuate significantly from
period to period and there can be no assurance that free cash flow will not be
negatively impacted by material changes in operating assets and liabilities in
future periods, since these changes depend upon, among other things,
management's timing of payments and control of inventory levels, and cash
receipts. In addition to fluctuations resulting from changes in operating
assets and liabilities, free cash flow can vary significantly from period to
period depending upon, among other things, subscriber growth, subscriber
revenue, subscriber churn, subscriber acquisition costs including amounts
capitalized under our equipment lease programs, operating efficiencies,
increases or decreases in purchases of property and equipment, and other
factors.
The following table reconciles free cash flow to "Net cash flows from operating
activities."
For the Three Months
Ended March 31,
2012 2011
(In thousands)
Free cash flow $ 689,622 $ 611,343
Add back:
Purchases of property and equipment 168,928 232,952
Net cash flows from operating activities $ 858,550 $ 844,295
Subscriber Base
DISH added approximately 104,000 net subscribers for the three months ended
March 31, 2012, compared to approximately 58,000 net subscribers for the same
period in 2011. The increase versus the same period in 2011 primarily resulted
from a decrease in our churn rate. See "Results of Operations" above for
further discussion. There are a number of factors that impact our future cash
flow compared to the cash flow we generate at any given point in time, including
subscriber churn and how successful we are at retaining our current
subscribers. As we lose subscribers from our existing base, the positive cash
flow from that base is correspondingly reduced.
Satellites
Operation of our subscription television service requires that we have adequate
satellite transmission capacity for the programming we offer. Moreover, current
competitive conditions require that we continue to expand our offering of new
programming, particularly by expanding local HD coverage and offering more
national HD channels. While we generally have had in-orbit satellite capacity
sufficient to transmit our existing channels and some backup capacity to recover
the transmission of certain critical programming, our backup capacity is
limited. In the event of a failure or loss of any of our satellites, we may
need to acquire or lease additional satellite capacity or relocate one of our
other satellites and use it as a replacement for the failed or lost satellite.
Such a loss or failure could result in a prolonged loss of critical programming
or a significant delay in our plans to expand programming as necessary to remain
competitive and cause us to expend a significant portion of our cash to acquire
or lease additional satellite capacity.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
Security Systems
Increases in theft of our signal or our competitors' signals could, in addition
to reducing new subscriber activations, also cause subscriber churn to
increase. We use microchips embedded in credit card-sized access cards, called
"smart cards," or security chips in our receiver systems to control access to
authorized programming content ("Security Access Devices"). Our signal
encryption has been compromised in the past and may be compromised in the future
even though we continue to respond with significant investment in security
measures, such as Security Access Device replacement programs and updates in
security software, that are intended to make signal theft more difficult. It
has been our prior experience that security measures may only be effective for
short periods of time or not at all and that we remain susceptible to additional
signal theft. During 2009, we completed the replacement of our Security Access
Devices and re-secured our system. We expect additional future replacements of
these devices will be necessary to keep our system secure. We cannot ensure
that we will be successful in reducing or controlling theft of our programming
content and we may incur additional costs in the future if our system's security
is compromised.
Stock Repurchases
Our Board of Directors previously authorized the repurchase of up to $1.0
billion of our Class A common stock. On November 1, 2011, our Board of
Directors extended the plan and authorized an increase in the maximum dollar
value of shares that may be repurchased under the plan, such that we are
currently authorized to repurchase up to $1.0 billion of outstanding shares of
our Class A common stock through and including December 31, 2012. As of
March 31, 2012, we may repurchase up to $1.0 billion under this plan.
Subscriber Acquisition and Retention Costs
We incur significant upfront costs to acquire subscribers, including
advertising, retailer incentives, equipment subsidies, installation services,
and new customer promotions. While we attempt to recoup these upfront costs
over the lives of their subscription, there can be no assurance that we will.
We employ business rules such as minimum credit requirements and we strive to
provide outstanding customer service, to increase the likelihood of customers
keeping their DISH service over longer periods of time. Our subscriber
acquisition costs may vary significantly from period to period.
We incur significant costs to retain our existing customers, mostly by upgrading
their equipment to HD and DVR receivers. As with our subscriber acquisition
costs, our retention spending includes the cost of equipment and installation
services. In certain circumstances, we also offer free programming and/or
promotional pricing for limited periods for existing customers in exchange for a
commitment to receive service for a minimum term. A component of our retention
efforts includes the installation of equipment for customers who move. Our
subscriber retention costs may vary significantly from period to period.
Seasonality
Historically, the first half of the year generally produces fewer gross new
subscriber activations than the second half of the year, as is typical in the
pay-TV service industry. In addition, the first and fourth quarter generally
produce a lower churn rate than the second and third quarter. However, we can
not provide assurance that this will continue in the future.
Covenants and Restrictions Related to our Senior Notes
The indentures related to our outstanding senior notes contain restrictive
covenants that, among other things, impose limitations on the ability of DISH
DBS Corporation ("DISH DBS") and its restricted subsidiaries to: (i) incur
additional indebtedness; (ii) enter into sale and leaseback transactions;
(iii) pay dividends or make distributions on DISH DBS' capital stock or
repurchase DISH DBS' capital stock; (iv) make certain investments; (v) create
liens; (vi) enter into certain transactions with affiliates; (vii) merge or
consolidate with another company; and (viii) transfer or sell assets. Should we
fail to comply with these covenants, all or a portion of the debt under the
senior notes could become immediately payable. The senior notes also provide
that the debt may be required to be prepaid if certain change-in-control events
occur. As of the date of filing, DISH DBS was in compliance with the covenants.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
Other
We are also vulnerable to fraud, particularly in the acquisition of new
subscribers. While we are addressing the impact of subscriber fraud through a
number of actions, there can be no assurance that we will not continue to
experience fraud, which could impact our subscriber growth and churn. Sustained
economic weakness may create greater incentive for signal theft and subscriber
fraud, which could lead to higher subscriber churn and reduced revenue.
Obligations and Future Capital Requirements
Future Capital Requirements
Wireless Spectrum
In 2008, we paid $712 million to acquire certain 700 MHz wireless spectrum
licenses, which were granted to us by the FCC in February 2009 subject to
certain build-out requirements. To commercialize these licenses and satisfy the
associated FCC build-out requirements, we will be required to make significant
additional investments or partner with others to, among other things, finance
the commercialization and build-out requirements of these licenses and our
integration efforts including compliance with regulations applicable to these
licenses. Depending on the nature and scope of such commercialization and
build-out, any such investment or partnership could vary significantly, which
may affect our future financial condition or results of operations. Part or all
of these licenses may be terminated if the associated FCC build-out requirements
are not satisfied. There can be no assurance that we will be able to develop
and implement a business model that will realize a return on these investments
and profitably deploy the spectrum represented by the 700 MHz licenses.
On March 2, 2012, the FCC approved the transfer of 40 MHz of 2 GHz wireless
spectrum licenses held by DBSD North America and TerreStar to us. On March 9,
2012, we closed the DBSD Transaction and the TerreStar Transaction, pursuant to
which we acquired, among other things, certain satellite assets and wireless
spectrum licenses held by DBSD North America and TerreStar. The total
consideration to acquire these assets was approximately $2.860 billion. This
amount includes $1.364 billion for the DBSD Transaction, $1.382 billion for the
TerreStar Transaction, and the net payment of $114 million to Sprint pursuant to
the Sprint Settlement Agreement.
Our consolidated FCC applications for approval of the license transfers from
DBSD North America and TerreStar were accompanied by requests for waiver of the
FCC's MSS "integrated service" and spare satellite requirements and various
technical provisions. The FCC denied our requests for waiver of the integrated
service and spare satellite requirements. The FCC has not yet acted on the
request for waiver of various technical provisions, and we cannot predict the
outcome or timing of any action by the FCC with respect to that waiver request.
Waiver of the integrated service requirement would have allowed us to offer
single-mode terrestrial terminals to customers who do not desire satellite
functionality. On March 21, 2012, the FCC released an NPRM that could result in
the elimination of the integrated service and other requirements that attach to
the 2 GHz licenses. Among other things, the FCC has proposed to modify our
licenses to allow us to offer single-mode terrestrial terminals to customers who
do not desire satellite functionality. The NPRM was published in the Federal
Register on April 17, 2012. Initial comments on the NPRM are due on or before
May 17, 2012, and reply comments are due on or before June 1, 2012. While the
FCC has indicated its intent to complete the NPRM during 2012, we cannot predict
the outcome or timing of the NPRM, including, without limitation, any associated
build-out requirements with which we may need to comply to avail ourselves of
any changes to the rules.
As a result of the completion of the DBSD Transaction and the TerreStar
Transaction, we will likely be required to make significant additional
investments or partner with others to, among other things, finance the
commercialization and build-out requirements of these licenses and our
integration efforts including compliance with regulations applicable to the
acquired licenses. Depending on the nature and scope of such commercialization
and build-out, any such investment or partnership could vary significantly.
There can be no assurance that we will be able to develop and implement a
business model that will realize a return on these spectrum investments or that
we will be able to profitably deploy the assets represented by these spectrum
investments, which may affect the carrying value of these assets and our future
financial condition or results of operations.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - Continued
Voom HD Holdings
If Voom prevails in its breach of contract suit against us, we could be required
to pay substantial damages, which would have a material adverse affect on our
financial position and results of operations. In January 2008, Voom filed a
lawsuit against us in New York Supreme Court, alleging breach of contract and
other claims arising from our termination of the affiliation agreement governing
carriage of certain Voom HD channels on the DISH branded pay-TV service. At
that time, Voom also sought a preliminary injunction to prevent us from
terminating the agreement. The Court denied Voom's request, finding, among
other things, that Voom had not demonstrated that it was likely to prevail on
the merits. In April 2010, we and Voom each filed motions for summary
judgment. Voom later filed two motions seeking discovery sanctions. On
November 9, 2010, the Court issued a decision denying both motions for summary
judgment, but granting Voom's motions for discovery sanctions. The Court's
decision provides for an adverse inference jury instruction at trial and
precludes our damages expert from testifying at trial. We appealed the grant of
Voom's motion for discovery sanctions to the New York State Supreme Court,
Appellate Division, First Department. On February 15, 2011, the appellate court
granted our motion to stay the trial pending our appeal. On January 31, 2012,
the appellate court affirmed the order imposing discovery sanctions and
precluding our damages expert from testifying at trial. We sought leave to
appeal to New York's highest state court, the Court of Appeals, but that motion
was denied on April 26, 2012. A trial date has not been set. Voom is claiming
over $2.5 billion in damages.
Strategic Investments or Acquisitions
From time to time we evaluate opportunities for strategic investments or
acquisitions that may complement our current services and products, enhance our
technical capabilities, improve or sustain our competitive position, or
otherwise offer growth opportunities. We may make investments in or partner
with others to expand our business into mobile and portable video, IPTV, data
and voice services. Future material investments or acquisitions may require
that we obtain additional capital, assume third party debt or incur other
long-term obligations.
Investments in ARS/MBS
A portion of our investment portfolio is invested in auction rate securities
("ARS"), mortgage backed securities ("MBS"), and strategic investments, and as a
result a portion of our portfolio has restricted liquidity. Liquidity in the
markets for these investments has been adversely impacted. If the credit
ratings of these securities deteriorate or the lack of liquidity in the
marketplace continues, we may be required to record impairment charges.
Moreover, the sustained uncertainty of domestic and global financial markets has
greatly affected the volatility and value of our marketable investment
securities. To the extent we require access to funds, we may need to sell these
securities under unfavorable market conditions, record further impairment
charges and fall short of our financing needs.
Off-Balance Sheet Arrangements
Other than the "Guarantees" disclosed in Note 11 in the Notes to our Condensed
Consolidated Financial Statements, we generally do not engage in off-balance
sheet financing activities.
56
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MetricNet Publishes 4 New Australian Benchmarks for IT Support, Contact Centres 
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