|
DISH NETWORK CORP - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge)
You should read the following management's discussion and analysis of our
financial condition and results of operations together with the audited
consolidated financial statements and notes to our financial statements included
elsewhere in this Annual 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 this report, including under the caption "Item 1A.
Risk Factors" in this Annual Report on Form 10-K.
EXECUTIVE SUMMARY
Overview
DISH added approximately 89,000 net Pay-TV subscribers during the year ended
December 31, 2012, compared to a loss of approximately 166,000 net Pay-TV
subscribers during the same period in 2011. The increase versus the same period
in 2011 primarily resulted from a decrease in our average monthly Pay-TV
subscriber churn rate and higher gross new Pay-TV subscriber activations due
primarily to increased advertising associated with our Hopper set-top box.
During the year ended December 31, 2012, DISH added approximately 2.739 million
gross new Pay-TV subscribers compared to approximately 2.576 million gross new
Pay-TV subscribers during the same period in 2011, an increase of 6.3%.
Our gross new Pay-TV subscriber activations continue to be negatively impacted
by increased competitive pressures, including aggressive marketing and
discounted promotional offers. In addition, our gross new Pay-TV subscriber
activations continue to be adversely affected by sustained economic weakness and
uncertainty.
Our average monthly Pay-TV subscriber churn rate for the year ended December 31,
2012 was 1.57% compared to 1.63% for the same period in 2011. Our Pay-TV
subscriber churn rate was positively impacted in part because we did not have a
programming package price increase in the first quarter 2012, but did during the
same period in 2011. While Pay-TV subscriber churn improved compared to the
same period in 2011, churn continues to be adversely affected by the increased
competitive pressures discussed above. Our Pay-TV subscriber churn rate is also
impacted by, among other things, the credit quality of previously acquired
subscribers, our ability to consistently provide outstanding customer service,
the aggressiveness of competitor subscriber acquisition efforts, and our ability
to control piracy and other forms of fraud.
On September 27, 2012, we began marketing our satellite broadband service under
the dishNET brand. This service leverages advanced technology and high-powered
satellites launched by Hughes and ViaSat to provide broadband coverage
nationwide. This service primarily targets approximately 15 million rural
residents that are underserved, or unserved, by wireline broadband, and provides
download speeds of up to 10 Mbps. We lease the customer premise equipment to
subscribers and generally pay Hughes and ViaSat a wholesale rate per subscriber
on a monthly basis. Currently, we generally utilize our existing DISH
distribution channels under similar incentive arrangements as our pay-TV
business to acquire new broadband subscribers.
In addition to the dishNET branded satellite broadband service, we also offer
wireline voice and broadband services under the dishNET brand as a competitive
local exchange carrier to consumers living in a 14-state region (Arizona,
Colorado, Idaho, Iowa, Minnesota, Montana, Nebraska, New Mexico, North Dakota,
Oregon, South Dakota, Utah, Washington and Wyoming). Our dishNET branded
wireline broadband service provides download speeds of up to 20 Mbps.
We primarily bundle our dishNET branded services with our DISH branded pay-TV
service, to offer customers a single bill, payment and customer service option,
which includes a discount for bundled services. In addition, we market and sell
our dishNET branded services on a stand-alone basis.
55
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
DISH added approximately 78,000 net broadband subscribers during the year ended
December 31, 2012 compared to a loss of approximately 5,000 net broadband
subscribers during the same period in 2011. This increase versus the same
period in 2011 primarily resulted from higher gross new broadband subscriber
activations driven by increased advertising associated with the launch of the
dishNET branded broadband services. During the year ended December 31, 2012,
DISH added approximately 121,000 gross new broadband subscribers compared to
30,000 gross new broadband subscribers during the same period in 2011. A
significant percentage of these activations were in the fourth quarter 2012,
driven by increased advertising associated with the launch of the dishNET
branded broadband services. During the fourth quarter 2012, we added
approximately 57,000 gross new broadband subscribers. Broadband services
revenue was $95 million for the year ended December 31, 2012, 0.7% of our total
"Subscriber-related revenue."
"Net income (loss) attributable to DISH Network" for the year ended December 31,
2012 was $637 million, compared to $1.516 billion for the same period in 2011.
During the year ended December 31, 2012, "Net income (loss) attributable to DISH
Network" decreased primarily due to $730 million of litigation expense related
to the Voom Settlement Agreement, higher subscriber-related expenses primarily
from higher programming costs, increased advertising associated with our Hopper
set-top box and the reversal of our accrued expenses related to the TiVo Inc.
settlement during 2011. This decrease was partially offset by the non-cash gain
of $99 million 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 10 in the Notes to the Consolidated Financial
Statements in Item 15 of this Annual Report on Form 10-K.
Our ability to compete successfully will depend on, among other things, our
ability to continue to obtain desirable programming and deliver it to our
subscribers at competitive prices. Programming costs represent a large
percentage of our "Subscriber-related expenses" and the largest component of our
total expense. We expect these costs to continue to increase, especially for
local broadcast channels and sports programming. 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. In addition, increases in
programming costs could cause us to increase the rates that we charge our
subscribers, which could in turn cause our existing Pay-TV subscribers to
disconnect our service or cause potential new Pay-TV subscribers to choose not
to subscribe to our service. Additionally, our gross new Pay-TV subscriber
activations and Pay-TV subscriber churn rate may be negatively impacted if we
are unable to renew our long-term programming contracts before they expire or if
we lose access to programming as a result of disputes with programming
suppliers.
As the pay-TV industry has matured, 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.
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
Pay-TV 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
56
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
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 number of our customers 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 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 introduced
the Hopper set-top box, that allows, among other things, recorded programming to
be viewed in HD in multiple rooms. During the second quarter 2012, the four
major broadcast television networks filed lawsuits against us alleging, among
other things, that the PrimeTime Anytime and AutoHop features of the Hopper
set-top box infringe their copyrights. In the event a court ultimately
determines that we infringe the asserted copyrights, we may be subject to, among
other things, an injunction that could require us to materially modify or cease
to offer these features. See Note 16 in the Notes to the Consolidated Financial
Statements in Item 15 of this Annual Report on Form 10-K for further
information. We recently introduced the Hopper set-top box with Sling, which
promotes a suite of integrated products designed to maximize the convenience and
ease of watching TV anytime and anywhere, which we refer to as DISH Anywhere™
that utilizes, among other things, online access and Slingbox "placeshifting"
technology. In addition, the Hopper with Sling has several innovative features
which allows customers to watch and record television programming through
certain tablet computers and combines program-discovery tools, social media
engagement and remote-control capabilities through the use of certain tablet
computers. 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 for 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. Blockbuster primarily offers
movies and video games for sale and rental through multiple distribution
channels such as retail stores, by-mail, the blockbuster.com website and the
BLOCKBUSTER On Demand service. The Blockbuster Acquisition is intended to
complement our core business of delivering high-quality video entertainment 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.
Blockbuster operations are included in our financial results beginning April 26,
2011. During the year ended December 31, 2012, Blockbuster operations
contributed $1.088 billion in revenue with a $35 million operating loss compared
to $975 million in revenue and $1 million in operating loss for the same period
in 2011. The operating loss during the year ended December 31, 2012 was
impacted by a charge of $21 million to "Cost of sales - equipment, merchandise,
services, rental and other" as a result of the Blockbuster UK Administration,
discussed below. In addition, this operating loss resulted from lower monthly
revenue and higher inventory costs per unit relative to the fair value of the
inventory costs per unit acquired in the Blockbuster Acquisition, partially
offset by the benefit from the sale of inventory from domestic retail stores
that were closed primarily during the first half of 2012. During 2012, we
closed approximately 700 domestic retail stores, leaving us with approximately
800
57
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
domestic retail stores as of December 31, 2012. In January 2013, we announced
the closing of approximately 300 additional domestic retail stores.
We continue to evaluate the impact of certain factors, including, among other
things, competitive pressures, the ability of significantly fewer Blockbuster
domestic retail stores to continue to support corporate administrative costs,
and other issues impacting the store-level financial performance of our
Blockbuster domestic retail stores. These factors, or other reasons, could lead
us to close additional Blockbuster domestic retail stores. In addition, to
reduce administrative expenses, we moved the Blockbuster headquarters to Denver
during June 2012.
Our Blockbuster UK Operating Entities entered into Administration in the United
Kingdom on January 16, 2013. Administrators have been appointed by the English
courts to sell or liquidate the assets of the Blockbuster UK Operating Entities
for the benefit of their creditors. Since we no longer exercise control and the
administrator now exercises control over all operating decisions for the
Blockbuster UK Operating Entities, we will be required to deconsolidate
Blockbuster UK during the first quarter 2013.
As a result of the Administration, we have written down the assets of
Blockbuster UK to their estimated net realizable value on our Consolidated
Balance Sheets as of December 31, 2012, and we recorded a charge to "Cost of
sales - equipment, merchandise, services, rental and other" of $21 million
during the year ended December 31, 2012 on our Consolidated Statements of
Operations and Comprehensive Income (Loss). Furthermore, we have intercompany
receivables due from Blockbuster UK of approximately $37 million that are
eliminated in consolidation on our Consolidated Balance Sheets as of
December 31, 2012. Upon deconsolidation of Blockbuster UK in the first quarter
2013, these intercompany receivables will no longer be eliminated in
consolidation. We currently believe that we will not receive the entire amount
for these intercompany receivables in the Administration. Accordingly, we
recorded a $25 million impairment charge related to these intercompany
receivables, to adjust this amount to their estimated net realizable value for
the year ended December 31, 2012. This impairment charge was recorded in
"Other, net" within "Other Income (Expense)" on our Consolidated Statements of
Operations and Comprehensive Income (Loss) and the resulting liability was
recorded in "Other accrued expenses" on our Consolidated Balance Sheets as of
December 31, 2012. The $25 million impairment liability will be offset against
the intercompany receivables that will be recorded upon deconsolidation in the
first quarter 2013. In total, we recorded charges described above totaling
approximately $46 million on a pre-tax basis on our Consolidated Statements of
Operations and Comprehensive Income (Loss) for the year ended December 31, 2012
related to the Administration. The proceeds that we actually receive from the
Administration and the actual impairment charge may differ from our estimates.
As of December 31, 2012, Blockbuster UK had total assets and liabilities as
follows (in thousands):
Cash $ 14,072
Trade accounts receivable 1,153
Inventory 34,937
Other current assets 10,243
Restricted cash and marketable securities 484
Property and equipment 186
Trade accounts payable (13,081 )
Intercompany payable (36,676 )
Deferred revenue and other (1,369 )
Other accrued expenses (9,949 )
Total net assets $ -
Upon deconsolidation in the first quarter 2013, the above amounts will be
combined into one net asset and the intercompany receivables of $37 million, net
of the impairment liability of $25 million described above, will be recorded in
"Other noncurrent assets, net" on our Consolidated Balance Sheets as a component
of our investment in Blockbuster UK.
For the years ended December 31, 2012 and 2011, Blockbuster UK had $293 million
and $242 million of revenue, respectively. In addition, for the years ended
December 31, 2012 and 2011, Blockbuster UK had an operating loss of $31 million
and operating income of $16 million, respectively. Upon deconsolidation in the
first quarter 2013,
58
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
the revenue and expenses related to Blockbuster UK will no longer be recorded in
our Consolidated Financial Statements.
Our Consolidated Statements of Operations and Comprehensive Income (Loss) for
the years ended December 31, 2012 and 2011 include the results of operations for
Blockbuster for twelve months and eight months, respectively. We did not have
any Blockbuster activity during 2010 as we acquired Blockbuster on April 26,
2011. Therefore, our results of operations for the years ended December 31,
2012, 2011 and 2010 are not comparable.
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 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 completed 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. In addition, during the fourth quarter 2011, we and
Sprint entered into the Sprint Settlement Agreement pursuant to which all issues
then being disputed relating to the DBSD Transaction and the TerreStar
Transaction 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. Pursuant to the
Sprint Settlement Agreement, we made a net payment of approximately $114 million
to Sprint. 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. The financial
results of DBSD North America and TerreStar are included in our results
beginning March 9, 2012.
We generated $1 million and less than $1 million of revenue for the years ended
December 31, 2012 and 2011, respectively from our wireless spectrum segment. In
addition, we incurred a $64 million operating loss and less than $1 million in
operating income for the years ended December 31, 2012 and 2011, respectively.
We incur general and administrative expenses associated with certain satellite
operations and regulatory compliance matters from our wireless spectrum assets.
We also incur depreciation and amortization expenses associated with certain
assets of DBSD North America and TerreStar. This depreciation and amortization
expense is based on our estimate of the fair value of these assets as disclosed
in Note 10 in the Notes to the Consolidated Financial Statements in Item 15 of
this Annual Report on Form 10-K. 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. However, since we are primarily a subscriber-based company, 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 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.
59
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
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
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 completed 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 but did not
initially act on our request for waiver of the various technical provisions. On
March 21, 2012, the FCC released a Notice of Proposed Rule Making ("NPRM")
proposing the elimination of the integrated service, spare satellite and various
technical requirements attached to the 2 GHz licenses. On December 11, 2012,
the FCC approved rules that eliminated these requirements and gave notice of its
proposed modification of our 2 GHz authorizations to, among other things, allow
us to offer single-mode terrestrial terminals to customers who do not desire
satellite functionality. On February 15, 2013, the FCC issued an order, which
will become effective on March 7, 2013, modifying our 2 GHz licenses to add
terrestrial operating authority. The FCC's order of modification has imposed
certain limitations on the use of a portion of this spectrum, including
interference protections for other spectrum users and power and emission limits
that we presently believe could render 5 MHz of our uplink spectrum effectively
unusable for terrestrial services and limit our ability to fully utilize the
remaining 15 MHz of our uplink spectrum for terrestrial services. These
limitations could, among other things, impact the finalization of technical
standards associated with our wireless business, and may have a material adverse
effect on our ability to commercialize these licenses. The new rules also
mandate certain interim and final build-out requirements for the licenses. By
March 2017, we must provide terrestrial signal coverage and offer terrestrial
service to at least 40% of the aggregate population represented by all of the
areas covered by the licenses (the "2 GHz Interim Build-out Requirement"). By
March 2020, we must provide terrestrial signal coverage and offer terrestrial
service to at least 70% of the population in each area covered by an individual
license (the "2 GHz Final Build-out Requirement"). If we fail to meet the 2 GHz
Interim Build-out Requirement, the 2 GHz Final Build-out Requirement will be
accelerated by one year, from March 2020 to March 2019. If we fail to meet the
2 GHz Final Build-out Requirement, our terrestrial authorization for each
license area in which we fail to meet the requirement will terminate. In
addition, the FCC is currently considering rules for a spectrum band that is
adjacent to our 2 GHz licenses, known as the "H Block." If the FCC adopts
rules for the H block that do not adequately protect our 2 GHz licenses, there
could be a material adverse effect on our ability to commercialize the 2 GHz
licenses.
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,
build-out, and integration efforts, any such investment or partnership could
vary significantly. Additionally, recent consolidation
60
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
in the wireless telecommunications industry, may, among other things, limit our
available options, including our ability to partner with others. 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 licenses or that we will be able to
profitably deploy the assets represented by these spectrum licenses, which may
affect the carrying value of these assets and our future financial condition or
results of operations.
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. These licenses
mandate certain interim and final build-out requirements. By June 2013, we must
provide signal coverage and offer service to at least 35% of the geographic area
in each area covered by each individual license (the "700 MHz Interim Build-out
Requirement"). By the end of our license term (June 2019), we must provide
signal coverage and offer service to at least 70% of the geographic area in each
area covered by each individual license (the "700 MHz Final Build-out
Requirement"). We have recently notified the FCC of our plans to commence
signal coverage in select cities within certain of these areas, but we have not
yet developed plans for providing signal coverage and offering service in all of
these areas. If we fail to meet the 700 MHz Interim Build-out Requirement, the
term of our licenses will be reduced, from June 2019 to June 2017, and we could
face possible fines and the reduction of license area(s). If we fail to meet
the 700 MHz Final Build-out Requirement, our authorization for each license area
in which we fail to meet the requirement will terminate. 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.
Depending on the nature and scope of such commercialization and build-out, any
such investment or partnership could vary significantly.
We have recently been engaged in discussions regarding a potential strategic
transaction with Clearwire. On January 8, 2013, Clearwire issued a press
release summarizing the proposed transaction at that time. Later that day, we
confirmed that we had formally approached Clearwire with respect to a potential
strategic transaction on the terms and conditions generally outlined in
Clearwire's press release. The terms and conditions for a potential strategic
transaction at that time disclosed by Clearwire generally provided for the
following, among others: (i) we would acquire approximately 24% of Clearwire's
total spectrum, for approximately $2.2 billion; and (ii) we would make an offer
to purchase up to all of Clearwire's outstanding shares at a price of $3.30 per
share in cash. This offer would be subject to certain conditions, including that
we acquire no less than 25% of the fully-diluted shares of Clearwire and receive
certain governance and minority protection rights. There is no assurance that
we will continue discussions with Clearwire or that we will ultimately be able
to conclude a transaction with Clearwire upon the terms outlined above or at
all.
To the extent that we are able to conclude a transaction with Clearwire, we may
be required to commit a significant portion of our cash and marketable
securities to fund these arrangements, and these commitments may cause us to
defer or curtail investments in our core business, strategic investments, share
repurchases or other transactions that we otherwise may have made. Furthermore,
Clearwire has experienced significant operating and financial challenges in its
recent history. Therefore, any investment we may make in Clearwire will be
speculative, and we may lose all of the investment. In addition, we may be
required to spend additional capital or raise additional capital to support an
investment in Clearwire's business and to build out a network to utilize the
spectrum acquired, which may not be available on acceptable terms or at all.
There can be no assurance that we will be able to develop and implement a
business model that will realize a return on a possible transaction with
Clearwire or that we will be able to profitably deploy the spectrum assets,
which may affect the carrying value of these assets and our future financial
condition or results of operations. If we are unable to successfully address
these challenges and risks, our business, financial condition or results of
operations will likely suffer.
61
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
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, broadband services,
equipment rental fees and other hardware related fees, including fees for DVRs,
fees for broadband equipment, 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 Pay-TV 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.
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 for pay-TV and broadband
services incurred in connection with our in-home service and call center
operations, billing costs, refurbishment and repair costs related to receiver
systems, subscriber retention, other variable subscriber expenses and monthly
wholesale fees paid to broadband providers. Prior to the fourth quarter 2012,
certain costs related to the acquisition of new broadband subscribers were
included in this category. Beginning in the fourth quarter 2012, our
"Subscriber-related expenses" exclude these costs related to the acquisition of
new broadband subscribers. During the fourth quarter 2012, expenses related to
the acquisition of new broadband subscribers for the period beginning January 1,
2012 through September 30, 2012 that were previously included in
"Subscriber-related expenses" were reclassified to "Subscriber acquisition
costs." These amounts associated with the acquisition of new broadband
subscribers for prior years were immaterial.
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.
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 segment 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 Pay-TV
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 Pay-TV 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. In addition, beginning in
the fourth quarter 2012, our "Subscriber acquisition costs" include the cost of
sales, direct sales efforts and costs related to installations associated with
our broadband services. During the fourth quarter 2012, certain expenses
related to our broadband services for the period beginning January 1, 2012
through September 30,
62
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
2012 that were previously included in "Subscriber-related expenses" were
reclassified to "Subscriber acquisition costs." These amounts associated with
our broadband services for 2011 were immaterial. We exclude the value of
equipment capitalized under our lease program for new Pay-TV and broadband
subscribers from "Subscriber acquisition costs."
Pay-TV 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
Pay-TV subscriber activation," or Pay-TV SAC, and we believe presentations of
Pay-TV SAC may not be calculated consistently by different companies in the same
or similar businesses. Our Pay-TV SAC is calculated as "Subscriber acquisition
costs," excluding "Subscriber acquisition costs" associated with our broadband
services, plus the value of equipment capitalized under our lease program for
new Pay-TV subscribers, divided by gross new Pay-TV subscriber activations. We
include all the costs of acquiring Pay-TV 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 Pay-TV
subscribers in our calculation, including Pay-TV subscribers added with little
or no subscriber acquisition costs. During the fourth quarter 2012, we have
elected to provide Pay-TV SAC rather than SAC, defined below, as we believe
Pay-TV SAC provides a more meaningful metric.
SAC. Historically, we have calculated SAC as "Subscriber acquisition costs,"
plus the value of equipment capitalized under our lease program for new
subscribers, divided by gross new subscriber activations. This metric included
the cost (e.g., subsidized and capitalized equipment) of acquiring Pay-TV
subscribers and certain costs of acquiring broadband subscribers. We also
included all new Pay-TV subscribers in our calculation, including Pay-TV
subscribers added with little or no subscriber acquisition costs. During the
fourth quarter 2012, we have elected to discontinue providing SAC as we believe
Pay-TV SAC, which excludes broadband subscriber acquisition costs, provides a
more meaningful metric.
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 and/or conversion 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," "Income
tax (provision) benefit, net" 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.
"Pay-TV subscribers." We include customers obtained through direct sales,
third-party retailers and other third-party distribution relationships in our
Pay-TV subscriber count. We also provide pay-TV 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 include the
resulting number, which is substantially smaller than the actual number of
commercial units served, in our Pay-TV 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
63
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
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 Pay-TV subscriber counts have not been
adjusted for this revised commercial accounts calculation as the impacts were
immaterial.
"Broadband subscribers." During the fourth quarter 2012, we elected to provide
certain broadband subscriber data. Each broadband customer is counted as one
broadband subscriber, regardless of whether they are also a Pay-TV subscriber.
A subscriber of both our pay-TV and broadband services is counted as one Pay-TV
subscriber and one broadband subscriber.
Pay-TV average monthly revenue per subscriber ("Pay-TV ARPU"). 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 Pay-TV average monthly revenue per subscriber, or
Pay-TV ARPU, by dividing average monthly "Subscriber-related revenue," excluding
revenue from broadband services, for the period by our average number of Pay-TV
subscribers for the period. The average number of Pay-TV subscribers is
calculated for the period by adding the average number of Pay-TV subscribers for
each month and dividing by the number of months in the period. The average
number of Pay-TV subscribers for each month is calculated by adding the
beginning and ending Pay-TV subscribers for the month and dividing by two.
During the fourth quarter 2012, we have elected to provide Pay-TV ARPU rather
than APRU, defined below, as we believe Pay-TV ARPU provides a more meaningful
metric.
Average monthly revenue per subscriber ("ARPU"). Historically, we have
calculated ARPU by dividing average monthly "Subscriber-related revenue" for the
period by our average number of Pay-TV subscribers for the period. The average
number of Pay-TV subscribers was calculated for the period by adding the average
number of Pay-TV subscribers for each month and dividing by the number of months
in the period. The average number of Pay-TV subscribers for each month was
calculated by adding the beginning and ending Pay-TV subscribers for the month
and dividing by two. During the fourth quarter 2012, we have elected to
discontinue providing ARPU as we believe Pay-TV ARPU, which excludes revenue
from broadband services, provides a more meaningful metric.
Pay-TV average monthly subscriber churn rate ("Pay-TV 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 Pay-TV
churn rate for any period by dividing the number of Pay-TV subscribers who
terminated service during the period by the average number of Pay-TV subscribers
for the same period, and further dividing by the number of months in the
period. When calculating Pay-TV subscriber churn, the same methodology for
calculating average number of Pay-TV subscribers is used as when calculating
Pay-TV 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
Consolidated Statements of Cash Flows.
64
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
RESULTS OF OPERATIONS
Year Ended December 31, 2012 Compared to the Year Ended December 31, 2011.
For the Years Ended December 31, Variance
Statements of Operations Data 2012 2011 Amount %
(In thousands)
Revenue:
Subscriber-related revenue $ 13,085,910 $ 12,976,009 $ 109,901 0.8
Equipment and merchandise sales,
rental and other revenue 1,162,664 1,035,910 126,754 12.2
Equipment sales, services and
other revenue - EchoStar 17,918 36,474 (18,556 ) (50.9 )
Total revenue 14,266,492 14,048,393 218,099 1.6
Costs and Expenses:
Subscriber-related expenses 7,254,458 6,845,611 408,847 6.0
% of Subscriber-related revenue 55.4 % 52.8 %
Satellite and transmission
expenses - EchoStar 424,543 441,541 (16,998 ) (3.8 )
% of Subscriber-related revenue 3.2 % 3.4 %
Satellite and transmission
expenses - Other 41,697 39,806 1,891 4.8
% of Subscriber-related revenue 0.3 % 0.3 %
Cost of sales - equipment,
merchandise, services, rental and
other 569,626 448,686 120,940 27.0
Subscriber acquisition costs 1,687,327 1,505,177 182,150 12.1
General and administrative
expenses 1,353,500 1,234,494 119,006 9.6
% of Total revenue 9.5 % 8.8 %
Litigation expense 730,457 (316,949 ) 1,047,406 *
Depreciation and amortization 983,049 922,073 60,976 6.6
Total costs and expenses 13,044,657 11,120,439 1,924,218 17.3
Operating income (loss) 1,221,835 2,927,954 (1,706,119 ) (58.3 )
Other Income (Expense):
Interest income 99,522 34,354 65,168 *
Interest expense, net of amounts
capitalized (536,879 ) (557,910 ) 21,031 3.8
Other, net 148,291 6,186 142,105 *
Total other income (expense) (289,066 ) (517,370 ) 228,304 44.1
Income (loss) before income taxes 932,769 2,410,584 (1,477,815 ) (61.3 )
Income tax (provision) benefit,
net (307,029 ) (895,006 ) 587,977 65.7
Effective tax rate 32.9 % 37.1 %
Net income (loss) 625,740 1,515,578 (889,838 ) (58.7 )
Less: Net income (loss)
attributable to noncontrolling
interest (10,947 ) (329 ) (10,618 ) *
Net income (loss) attributable to
DISH Network $ 636,687 $ 1,515,907 $ (879,220 ) (58.0 )
Other Data:
Pay-TV subscribers, as of period
end (in millions) 14.056 13.967 0.089 0.6
Pay-TV subscriber additions, gross
(in millions) 2.739 2.576 0.163 6.3
Pay-TV subscriber additions, net
(in millions) 0.089 (0.166 ) 0.255 *
Pay-TV average monthly subscriber
churn rate 1.57 % 1.63 % (0.06 )% (3.7 )
Pay-TV average subscriber
acquisition cost per subscriber
("Pay-TV SAC") $ 784 $ 770 $ 14 1.8
Pay-TV average monthly revenue per
subscriber ("Pay-TV ARPU") $ 77.10 $ 76.45 $ 0.65 0.9
Broadband subscribers, as of
period end (in millions) 0.183 0.105 0.078 74.3
Broadband subscriber additions,
gross (in millions) 0.121 0.030 0.091 *
Broadband subscriber additions,
net (in millions) 0.078 (0.005 ) 0.083 *
EBITDA $ 2,364,122 $ 3,856,542 $ (1,492,420 ) (38.7 )
--------------------------------------------------------------------------------
* Percentage is not meaningful.
65
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
Pay-TV subscribers. DISH added approximately 89,000 net Pay-TV subscribers
during the year ended December 31, 2012, compared to a loss of approximately
166,000 net Pay-TV subscribers during the same period in 2011. The increase
versus the same period in 2011 primarily resulted from a decrease in our average
monthly Pay-TV subscriber churn rate and higher gross new Pay-TV subscriber
activations due primarily to increased advertising associated with our Hopper
set-top box. During the year ended December 31, 2012, DISH added approximately
2.739 million gross new Pay-TV subscribers compared to approximately 2.576
million gross new Pay-TV subscribers during the same period in 2011, an increase
of 6.3%.
Our gross new Pay-TV subscriber activations continue to be negatively impacted
by increased competitive pressures, including aggressive marketing and
discounted promotional offers. Telecommunications companies have continued to
grow their pay-TV customer bases. In addition, our gross new Pay-TV subscriber
activations continue to be adversely affected by sustained economic weakness and
uncertainty.
Our average monthly Pay-TV subscriber churn rate for the year ended December 31,
2012 was 1.57% compared to 1.63% for the same period in 2011. Our Pay-TV
subscriber churn rate was positively impacted in part because we did not have a
programming package price increase in the first quarter 2012, but did during the
same period in 2011. While Pay-TV subscriber churn improved compared to the
same period in 2011, churn continues to be adversely affected by the increased
competitive pressures discussed above. Our Pay-TV subscriber churn rate is also
impacted by, among other things, the credit quality of previously acquired
subscribers, our ability to consistently provide outstanding customer service,
the aggressiveness of competitor subscriber acquisition efforts, and our ability
to control piracy and other forms of fraud.
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 Pay-TV subscriber activations as well as existing Pay-TV churn rate. Our
future gross new Pay-TV subscriber activations and Pay-TV churn rate may be
negatively impacted by these factors, which could in turn adversely affect our
revenue growth.
Broadband subscribers. DISH added approximately 78,000 net broadband
subscribers during the year ended December 31, 2012, compared to a loss of
approximately 5,000 net broadband subscribers during the same period in 2011.
This increase versus the same period in 2011 primarily resulted from higher
gross new broadband subscriber activations driven by increased advertising
associated with the launch of dishNET branded broadband services. During the
year ended December 31, 2012, DISH added approximately 121,000 gross new
broadband subscribers compared to approximately 30,000 gross new broadband
subscribers during the same period in 2011.
The pace of net broadband subscriber activations increased in the fourth quarter
primarily driven by increased advertising associated with the launch of dishNET
branded broadband services. Of the 2012 net broadband subscriber activations,
34,000 occurred during the nine months ended September 30, 2012 and 44,000
occurred during the three months ended December 31, 2012. The following table
details gross and net broadband subscriber additions by quarter for the year
ended December 31, 2012.
Gross Net
Broadband Subscribers Additions Additions
(In thousands)
First Quarter, 2012 14 6
Second Quarter, 2012 21 11
Third Quarter, 2012 29 17
Fourth Quarter, 2012 57 44
Total 121 78
Subscriber-related revenue. "Subscriber-related revenue" totaled $13.086
billion for the year ended December 31, 2012, an increase of $110 million or
0.8% compared to the same period in 2011. The change in "Subscriber-related
revenue" from the previous year was primarily related to the increase in Pay-TV
ARPU discussed below. Included
66
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
in "Subscriber-related revenue" is $95 million and $81 million of revenue
related to our broadband services for the years ended December 31, 2012 and
2011, respectively.
Pay-TV ARPU. "Pay-TV average monthly revenue per subscriber" was $77.10 during
the year ended December 31, 2012 versus $76.45 during the same period in 2011.
The $0.65 or 0.9% increase in Pay-TV ARPU was primarily attributable to higher
hardware related revenue. The following table details Pay-TV ARPU by quarter
for the year ended December 31, 2012.
Pay-TV
Pay-TV ARPU ARPU
First Quarter, 2012 $ 76.24
Second Quarter, 2012 77.59
Third Quarter, 2012 76.99
Fourth Quarter, 2012 77.59
Year-to-date, 2012 77.10
Equipment and merchandise sales, rental and other revenue. "Equipment and
merchandise sales, rental and other revenue" totaled $1.163 billion for the year
ended December 31, 2012, an increase of $127 million compared to the same period
in 2011. This increase was primarily driven by a full year of revenue in 2012
compared to approximately eight months in the previous year 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. Blockbuster operations are included in
our financial results beginning April 26, 2011. This increase was partially
offset by a decline in revenue as a result of Blockbuster domestic store
closings during 2012 and 2011.
Subscriber-related expenses. "Subscriber-related expenses" totaled $7.254
billion during the year ended December 31, 2012, an increase of $409 million or
6.0% compared to the same period in 2011. The increase in "Subscriber-related
expenses" was primarily attributable to higher programming costs. 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. During
the fourth quarter 2012, $6 million of expenses related to the acquisition of
broadband subscribers for the period beginning January 1, 2012 through
September 30, 2012 that were previously included in "Subscriber-related
expenses" were reclassified to "Subscriber acquisition costs." These amounts
associated with our broadband services for 2011 were immaterial.
"Subscriber-related expenses" represented 55.4% and 52.8% of "Subscriber-related
revenue" during the year ended December 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 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 $570 million
for the year ended December 31, 2012, an increase of $121 million compared to
the same period in 2011. This increase was primarily driven by a full year of
expense in 2012 compared to approximately eight months in the previous year 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. In addition, our
"Cost of sales - equipment, merchandise, services, rental and other" was
adversely impacted by a charge of $21 million as a result of the Blockbuster UK
Administration, and higher inventory costs per unit during the year ended
December 31, 2012 compared to the fair value of the inventory costs per unit
acquired in the Blockbuster Acquisition which were expensed during the prior
period. See Note 10 in the Notes to the Consolidated Financial Statements in
Item 15 of this Annual Report on Form 10-K for further discussion. These
increases were partially offset by a decline in expense as a result of
Blockbuster domestic store closings during 2012 and 2011. Blockbuster
operations are included in our financial results beginning April 26, 2011.
67
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
Subscriber acquisition costs. "Subscriber acquisition costs" totaled $1.687
billion for the year ended December 31, 2012, an increase of $182 million or
12.1% compared to the same period in 2011. This increase was primarily
attributable to the increase in gross new subscriber activations and SAC
described below. The $1.687 billion of subscriber acquisition costs includes $6
million of expenses related to our broadband services for the period beginning
January 1, 2012 through September 30, 2012 that were previously included in
"Subscriber-related expenses" and were reclassified to "Subscriber acquisition
costs." These amounts associated with our broadband services for 2011 were
immaterial.
Pay-TV SAC. Pay-TV SAC was $784 during the year ended December 31, 2012
compared to $770 during the same period in 2011, an increase of $14 or 1.8%.
This increase was primarily attributable to increased advertising associated
with our Hopper set-top box. The following table details Pay-TV SAC by quarter
for the year ended December 31, 2012.
Pay-TV
Pay-TV SAC SAC
First Quarter, 2012 $ 747
Second Quarter, 2012 800
Third Quarter, 2012 797
Fourth Quarter, 2012 791
Year-to-date, 2012 784
During the years ended December 31, 2012 and 2011, the amount of equipment
capitalized under our lease program for new Pay-TV subscribers totaled $506
million and $480 million, respectively. This increase in capital expenditures
under our lease program for new Pay-TV subscribers resulted primarily from an
increase in gross new Pay-TV subscribers. Capital expenditures resulting from
our equipment lease program for new Pay-TV subscribers were partially mitigated
by the redeployment of equipment returned by disconnecting lease program Pay-TV
subscribers.
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 Pay-TV SAC
reduction associated with redeployment of that returned lease equipment.
Our Pay-TV 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 years ended December 31, 2012 and 2011,
these amounts totaled $140 million and $96 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 number 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 "Pay-TV 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 "Other Liquidity Items - Subscriber Acquisition and Retention
Costs."
68
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
General and administrative expenses. "General and administrative expenses"
totaled $1.354 billion during the year ended December 31, 2012, a $119 million
or 9.6% increase compared to the same period in 2011. This increase was
primarily due to increased personnel and infrastructure expenses for DISH
Network and the inclusion of twelve months of costs in 2012 for personnel,
building and maintenance and other administrative costs associated with our
Blockbuster operations compared to eight months during the previous year.
Blockbuster operations are included in our financial results beginning April 26,
2011.
Litigation expense. "Litigation expense" related to legal settlements,
judgments or accruals associated with certain significant litigation totaled
$730 million during the year ended December 31, 2012 related to the Voom
Settlement Agreement. During the year ended December 31, 2011, "Litigation
expense" totaled a negative $317 million. During the year ended December 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 16
and Note 20 in the Notes to our Consolidated Financial Statements in Item 15 of
this Annual Report on Form 10-K for further discussion.
Depreciation and amortization. "Depreciation and amortization" expense totaled
$983 million during the year ended December 31, 2012, a $61 million or 6.6%
increase compared to the same period in 2011. This change in "Depreciation and
amortization" expense was primarily due to $68 million of depreciation expense
related to the 148 degree orbital location in 2012 and an increase in
depreciation expense associated with additional assets which were placed in
service to support DISH Network, partially offset by a decrease in depreciation
expense on equipment leased to subscribers. See Note 8 in the Notes to the
Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K
for further discussion.
Interest income. "Interest income" totaled $100 million during the year ended
December 31, 2012, an increase of $65 million compared to the same period in
2011. This increase principally resulted from higher percentage returns earned
on our cash and marketable investment securities and higher average cash and
marketable investment securities balances during the year ended December 31,
2012.
Interest expense, net of amounts capitalized. "Interest expense, net of amounts
capitalized" totaled $537 million during the year ended December 31, 2012, a
decrease of $21 million or 3.8% compared to the same period in 2011. This
change primarily resulted from capitalized interest of $106 million related to
our wireless spectrum, partially offset by the net interest expense associated
with the issuances and redemption of our senior notes during 2012 and 2011.
Other, net. "Other, net" income totaled $148 million during the year ended
December 31, 2012, an increase of $142 million compared to the same period in
2011. This change primarily 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 during
the first quarter 2012 and an increase in net gains on the sale of marketable
investment securities of $96 million, partially offset by an increase in
impairment charges of $32 million during 2012. In addition, this change was
impacted by a $25 million impairment charge related to the Blockbuster UK
Administration. See Note 6 and Note 10 in the Notes to the Consolidated
Financial Statements in Item 15 of this Annual Report on Form 10-K for further
discussion.
69
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
Earnings before interest, taxes, depreciation and amortization. EBITDA was
$2.364 billion during the year ended December 31, 2012, a decrease of $1.492
billion or 38.7% compared to the same period in 2011. EBITDA for year ended
December 31, 2012 was unfavorably impacted by $730 million of litigation expense
related to the Voom Settlement Agreement and an increase in "Subscriber-related
expense." EBITDA for the year ended December 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. The following table reconciles EBITDA
to the accompanying financial statements.
For the Years Ended
December 31,
2012 2011
(In thousands)
EBITDA $ 2,364,122 $ 3,856,542
Interest expense, net (437,357 ) (523,556 )
Income tax (provision) benefit, net (307,029 ) (895,006 )
Depreciation and amortization (983,049 ) (922,073 )
Net income (loss) attributable to DISH Network $ 636,687 $ 1,515,907
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 $307 million
during the year ended December 31, 2012, a decrease of $588 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 $637 million during the year ended December 31, 2012, a
decrease of $879 million compared to $1.516 billion for the same period in
2011. The decrease was primarily attributable to the changes in revenue and
expenses discussed above.
70
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010.
For the Years Ended December 31, Variance
Statements of Operations Data 2011 2010 Amount %
(In thousands)
Revenue:
Subscriber-related revenue $ 12,976,009 $ 12,543,794 $ 432,215 3.4
Equipment and merchandise sales,
rental and other revenue 1,035,910 59,770 976,140 *
Equipment sales, services and other
revenue - EchoStar 36,474 37,180 (706 ) (1.9 )
Total revenue 14,048,393 12,640,744 1,407,649 11.1
Costs and Expenses:
Subscriber-related expenses 6,845,611 6,676,145 169,466 2.5
% of Subscriber-related revenue 52.8 % 53.2 %
Satellite and transmission expenses
- EchoStar 441,541 418,358 23,183 5.5
% of Subscriber-related revenue 3.4 % 3.3 %
Satellite and transmission expenses
- Other 39,806 40,249 (443 ) (1.1 )
% of Subscriber-related revenue 0.3 % 0.3 %
Cost of sales - equipment,
merchandise, services, rental and
other 448,686 76,406 372,280 *
Subscriber acquisition costs 1,505,177 1,653,494 (148,317 ) (9.0 )
General and administrative expenses 1,234,494 625,843 608,651 97.3
% of Total revenue 8.8 % 5.0 %
Litigation expense (316,949 ) 225,456 (542,405 ) *
Depreciation and amortization 922,073 983,965 (61,892 ) (6.3 )
Total costs and expenses 11,120,439 10,699,916 420,523 3.9
Operating income (loss) 2,927,954 1,940,828 987,126 50.9
Other Income (Expense):
Interest income 34,354 25,158 9,196 36.6
Interest expense, net of amounts
capitalized (557,910 ) (454,777 ) (103,133 ) (22.7 )
Other, net 6,186 30,996 (24,810 ) (80.0 )
Total other income (expense) (517,370 ) (398,623 ) (118,747 ) (29.8 )
Income (loss) before income taxes 2,410,584 1,542,205 868,379 56.3
Income tax (provision) benefit, net (895,006 ) (557,473 ) (337,533 ) (60.5 )
Effective tax rate 37.1 % 36.1 %
Net income (loss) 1,515,578 984,732 530,846 53.9
Less: Net income (loss)
attributable to noncontrolling
interest (329 ) 3 (332 ) *
Net income (loss) attributable to
DISH Network $ 1,515,907 $ 984,729 $ 531,178 53.9
Other Data:
Pay-TV subscribers, as of period
end (in millions) 13.967 14.133 (0.166 ) (1.2 )
Pay-TV subscriber additions, gross
(in millions) 2.576 3.052 (0.476 ) (15.6 )
Pay-TV subscriber additions, net
(in millions) (0.166 ) 0.033 (0.199 ) *
Average monthly subscriber churn
rate 1.63 % 1.76 % (0.13 )% (7.4 )
Average subscriber acquisition cost
per subscriber ("SAC") $ 771 $ 776 $ (5 ) (0.6 )
Average monthly revenue per
subscriber ("ARPU") $ 76.93 $ 73.32 $ 3.61 4.9
EBITDA $ 3,856,542 $ 2,955,786 $ 900,756 30.5
--------------------------------------------------------------------------------
* Percentage is not meaningful.
71
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
Pay-TV subscribers. DISH lost approximately 166,000 net Pay-TV subscribers
during the year ended December 31, 2011, compared to a gain of approximately
33,000 net new Pay-TV subscribers during the same period in 2010. The change
versus the prior year primarily resulted from a decline in gross new Pay-TV
subscriber activations. During the year ended December 31, 2011, DISH added
approximately 2.576 million gross new Pay-TV subscribers compared to
approximately 3.052 million gross new Pay-TV subscribers during the same period
in 2010, a decrease of 15.6%.
Our gross activations and net Pay-TV subscriber additions were negatively
impacted during the year ended December 31, 2011 compared to the same period in
2010 as a result of increased competitive pressures, including aggressive
marketing and the effectiveness of certain competitors' promotional offers,
which included an increased level of programming discounts. In addition,
telecommunications companies continue to grow their respective customer bases.
Our gross activations and net Pay-TV subscriber additions continue to be
adversely affected during the year ended December 31, 2011 by sustained economic
weakness and uncertainty, including, among other things, the weak housing market
in the United States combined with lower discretionary spending.
Our Pay-TV churn rate for the year ended December 31, 2011 was 1.63%, compared
to 1.76% for the same period in 2010. While our Pay-TV churn rate improved
compared to the same period in 2010, our Pay-TV churn rate continues to be
adversely affected by the increased competitive pressures discussed above. In
general, our Pay-TV churn rate is impacted by the quality of Pay-TV subscribers
acquired in past quarters, our ability to provide outstanding customer service,
and our ability to control piracy.
Subscriber-related revenue. DISH "Subscriber-related revenue" totaled $12.976
billion for the year ended December 31, 2011, an increase of $432 million or
3.4% compared to the same period in 2010. This change was primarily related to
the increase in "ARPU" discussed below.
ARPU. "Average monthly revenue per subscriber" was $76.93 during the year ended
December 31, 2011 versus $73.32 during the same period in 2010. The $3.61 or
4.9% increase in ARPU was primarily attributable to price increases during the
past year, higher hardware related revenue and fees earned from our in-home
service operations, 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 $1.036 billion for the year
ended December 31, 2011, an increase of $976 million compared to the same period
in 2010. 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
accessories related to our Blockbuster operations which commenced April 26,
2011.
Subscriber-related expenses. "Subscriber-related expenses" totaled $6.846
billion during the year ended December 31, 2011, an increase of $169 million or
2.5% compared to the same period in 2010. The increase in "Subscriber-related
expenses" was primarily attributable to higher programming costs and an increase
in customer retention expense, partially offset by reduced costs related to our
call centers. 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 52.8% and 53.2% of
"Subscriber-related revenue" during the year ended December 31, 2011 and 2010,
respectively. The improvement in this expense to revenue ratio primarily
resulted from an increase in "Subscriber-related revenue," partially offset by
higher programming costs, discussed above.
Cost of sales - equipment, merchandise, services, rental and other. "Cost of
sales - equipment, merchandise, services, rental and other" totaled $449 million
for the year ended December 31, 2011, an increase of $372 million compared to
the same period in 2010. 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 accessories related to our Blockbuster operations which
commenced April 26, 2011.
Subscriber acquisition costs. "Subscriber acquisition costs" totaled $1.505
billion for the year ended December 31, 2011, a decrease of $148 million or 9.0%
compared to the same period in 2010. This decrease was primarily attributable
to a decline in gross new subscriber activations.
72
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
SAC. SAC was $771 during the year ended December 31, 2011 compared to $776
during the same period in 2010, a decrease of $5 or 0.6%. This decrease was
primarily attributable to an increase in the percentage of redeployed receivers
that were installed.
During the years ended December 31, 2011 and 2010, the amount of equipment
capitalized under our lease program for new subscribers totaled $480 million and
$716 million, respectively. This decrease in capital expenditures under our
lease program for new subscribers resulted primarily from a decrease in gross
new subscriber activations and an increase in the percentage of redeployed
receivers that were installed.
Capital expenditures resulting from our equipment lease program for new
subscribers were partially mitigated by the redeployment of equipment returned
by disconnecting lease program subscribers. 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 years ended December 31, 2011 and 2010,
these amounts totaled $96 million and $108 million, respectively.
General and administrative expenses. "General and administrative expenses"
totaled $1.234 billion during the year ended December 31, 2011, a $609 million
increase compared to the same period in 2010. This increase was primarily due
to an increase in personnel, building and maintenance and other administrative
costs associated with our Blockbuster operations which commenced April 26, 2011.
Litigation expense. "Litigation expense" totaled a negative $317 million during
the year ended December 31, 2011, a reduction in expense of $542 million
compared to the same period in 2010. See Note 20 in the Notes to our
Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K
for further discussion.
Depreciation and amortization. "Depreciation and amortization" expense totaled
$922 million during the year ended December 31, 2011, a $62 million or 6.3%
decrease compared to the same period in 2010. 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 2011 compared to the same period in 2010 and less
equipment write-offs from disconnecting subscribers. This decrease was
partially offset by an increase in depreciation on satellites as a result of
EchoStar XIV and EchoStar XV being placed into service during the second and
third quarters 2010, respectively.
Interest expense, net of amounts capitalized. "Interest expense, net of amounts
capitalized" totaled $558 million during the year ended December 31, 2011, an
increase of $103 million or 22.7% compared to the same period in 2010. 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 and
a decrease in the amount of interest capitalized, partially offset by a decrease
in interest expense as a result of the repurchases and redemptions of our 6 3/8%
Senior Notes due 2011.
73
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
Earnings before interest, taxes, depreciation and amortization. EBITDA was
$3.857 billion during the year ended December 31, 2011, an increase of $901
million or 30.5% compared to the same period in 2010. The following table
reconciles EBITDA to the accompanying financial statements.
For the Years Ended
December 31,
2011 2010
(In thousands)
EBITDA $ 3,856,542 $ 2,955,786
Interest expense, net (523,556 ) (429,619 )
Income tax (provision) benefit, net (895,006 ) (557,473 )
Depreciation and amortization (922,073 ) (983,965 )
Net income (loss) attributable to DISH Network $ 1,515,907 $ 984,729
EBITDA is not a measure determined in accordance with 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 $895 million
during the year ended December 31, 2011, an increase of $338 million compared to
the same period in 2010. The increase in the provision was primarily related to
the increase in "Income (loss) before income taxes."
Net income (loss) attributable to DISH Network. "Net income (loss) attributable
to DISH Network" was $1.516 billion during the year ended December 31, 2011, an
increase of $531 million compared to $985 million for the same period in 2010.
The increase was primarily attributable to the changes in revenue and expenses
discussed above.
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 7A. - Quantitative and Qualitative Disclosures
About Market Risk" for further discussion regarding our marketable investment
securities. As of December 31, 2012, our cash, cash equivalents and current
marketable investment securities totaled $7.238 billion compared to $2.041
billion as of December 31, 2011, an increase of $5.197 billion. This increase
in cash, cash equivalents and current marketable investment securities was
primarily related to cash generated from operations of $2.012 billion, the net
proceeds of $4.387 billion related to the issuance of our long-term debt and an
increase of $187 million in the value of certain marketable investment
securities, partially offset by capital expenditures of $958 million and the
$453 million dividend paid in cash on our Class A and Class B common stock.
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 mainly of investments in
municipalities, which are backed by financial institutions or other highly rated
obligors 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 December 31, 2012 and 2011, we held VRDNs, within our current marketable
investment securities portfolio, with fair values of $130 million and $161
million, respectively.
74
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
The following discussion highlights our cash flow activities during the years
ended December 31, 2012, 2011 and 2010.
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 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 years ended December 31, 2012, 2011 and 2010, 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 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 Years Ended December 31,
2012 2011 2010
(In thousands)
Free cash flow $ 1,054,309 $ 1,794,973 $ 923,670
Add back:
Purchases of property and equipment 957,566 778,905 1,216,132
Net cash flows from operating activities $ 2,011,875 $ 2,573,878 $ 2,139,802
The decrease in free cash flow from 2011 to 2012 of $741 million resulted from a
decease in "Net cash flows from operating activities" of $562 million and an
increase in "Purchases of property and equipment" of $179 million. The decrease
in "Net cash flows from operating activities" was primarily attributable to a
$1.271 billion decrease of net income adjusted to exclude non-cash charges for
"Depreciation and amortization" expense, "Realized and unrealized losses (gains)
on investments," and "Deferred tax expense (benefit)," which includes the
negative impact of $676 million of payments for the Voom Settlement Agreement.
See Note 16 in the Notes to our Consolidated Financial Statements in Item 15 of
this Annual Report on Form 10-K. This decrease was partially offset by a $684
million increase in cash resulting from changes in operating assets and
liabilities. The increase in cash resulting from changes in operating assets
and liabilities is principally attributable to the unfavorable impact in 2011 of
the settlement of the TiVo litigation and timing differences between book
expense and tax payments. The increase in "Purchases of property and equipment"
in 2012 was primarily attributable to an increase in satellite construction and
other corporate capital expenditures.
The increase in free cash flow from 2010 to 2011 of $871 million resulted from
an increase in "Net cash flows from operating activities" of $434 million and a
decrease in "Purchases of property and equipment" of $437 million. The increase
in "Net cash flows from operating activities" was primarily attributable to a
$895 million increase in cash resulting from net income, adjusted to exclude
non-cash changes in "Deferred tax expense (benefit)," and "Depreciation and
amortization" expense, partially offset by a $502 million decrease in cash
resulting from changes in operating assets and liabilities. The decrease in
cash resulting from changes in operating assets and liabilities is principally
attributable to timing differences between book expense and cash payments and
$350 million in payments for the TiVo and Retailer Class Action settlements.
The decrease in "Purchases of property and equipment" in 2011
75
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
was primarily attributable to a decrease in satellite construction and a decline
in expenditures for equipment under our lease programs for new and existing
subscribers of $241 million.
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. During the year ended December 31,
2011, our "Deferred income tax expense (benefit)" recorded as a non-cash
adjustment to net income on our Consolidated Statements of Cash Flows increased
$427 million compared to the same period in 2010. This change is primarily
associated with equipment-related temporary differences as a result of bonus
depreciation deductions available in 2011.
Cash flows from operating activities. We typically reinvest the cash flow from
operating activities in our business primarily to grow our subscriber base and
to expand our infrastructure. For the years ended December 31, 2012, 2011 and
2010, we reported net cash flows from operating activities of $2.012 billion,
$2.574 billion, and $2.140 billion, respectively. See discussion of changes in
net cash flows from operating activities included in "Free cash flow" above.
Cash flows from investing activities. Our investing activities generally
include purchases and sales of marketable investment securities, acquisitions,
strategic investments and cash used to grow our subscriber base and expand our
infrastructure. For the years ended December 31, 2012, 2011 and 2010, we
reported net cash outflows from investing activities of $3.019 billion, $2.695
billion and $1.478 billion, respectively. During the years ended December 31,
2012, 2011 and 2010, capital expenditures for new and existing pay-TV customer
equipment totaled $703 million, $701 million and $942 million, respectively.
During the year ended December 31, 2012, capital expenditures for new and
existing broadband customer equipment totaled $24 million, of which $22 million
was for new broadband customer equipment. During the years ended December 31,
2011 and 2010, capital expenditures for broadband customer equipment were
immaterial.
The increase in net cash outflows from investing activities from 2011 to 2012 of
$324 million primarily related to net purchases of marketable investment
securities of $2.728 billion and capital expenditures of $179 million, partially
offset by a decrease in net purchases of strategic investments of $2.637
billion. The increase in capital expenditures included $37 million for
satellites, $26 million associated with our pay-TV and broadband subscriber
acquisition and retention lease programs and $116 million of other corporate
capital expenditures. The decrease in net purchases of strategic investments
primarily resulted from our 2011 investments in DBSD North America of $1.139
billion and in TerreStar of $1.345 billion.
The increase in net cash outflows from investing activities from 2010 to 2011 of
$1.218 billion primarily resulted from our investment in DBSD North America of
$1.139 billion, the TerreStar Transaction of $1.345 billion, the Blockbuster
Acquisition of $127 million, net of $107 million cash received, and the Sprint
Settlement Agreement net payment of $114 million which were partially offset by
a net increase in sales of marketable investment securities of $1.072 billion
and a decline in capital expenditures of $437 million.
Cash flows from financing activities. Our financing activities generally
include net proceeds related to the issuance of long-term debt, cash used for
the repurchase, redemption or payment of long-term debt and capital lease
obligations, dividends paid on our Class A and Class B common stock and
repurchases of our Class A common stock. For the years ended December 31, 2012
and 2011, we reported net cash inflows from financing activities of $4.002
billion and $94 million, respectively. For the year ended December 31, 2010, we
reported net cash outflows from financing activities of $127 million.
The net cash inflows in 2012 primarily related to the net proceeds of $4.387
billion related to the issuance of our 5 7/8% Senior Notes due 2022, our 4 5/8%
Senior Notes due 2017 and our 5% Senior Notes due 2023, partially offset by the
$453 million dividend paid in cash on our Class A and Class B common stock.
The net cash inflows in 2011 primarily related to the proceeds of $1.973 billion
from the issuance of our 6 3/4% Senior Notes due 2021, net of deferred financing
costs, partially offset by the redemption and repurchases of our 6 3/8% Senior
Notes due 2011 of $1.0 billion and our dividend payment of $893 million.
The net cash outflows in 2010 primarily related to the repurchases of our
Class A common stock.
76
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
Other Liquidity Items
Subscriber Base
DISH added approximately 89,000 net Pay-TV subscribers during the year ended
December 31, 2012, compared to a loss of approximately 166,000 net Pay-TV
subscribers during the same period in 2011. The increase versus the same period
in 2011 primarily resulted from a decrease in our average monthly Pay-TV
subscriber churn rate and higher gross new Pay-TV subscriber activations due
primarily to increased advertising associated with our Hopper set-top box. 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 our Pay-TV churn rate and how successful
we are at retaining our current Pay-TV subscribers. As we lose Pay-TV
subscribers from our existing base, the positive cash flow from that base is
correspondingly reduced.
Satellites
Operation of our pay-TV 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. 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
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.
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 Security Access Devices in our receiver systems to control
access to authorized programming content. 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 2, 2012, our Board of
Directors extended this authorization 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, 2013. As of December 31, 2012, we may
repurchase up to $1.0 billion under this plan. During the years ended
December 31, 2012 and 2011, there were no repurchases of our Class A common
stock. During the year ended December 31, 2010, we repurchased 6.0 million
shares of our Class A common stock for $107 million in the aggregate.
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
77
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
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.
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 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's capital stock or repurchase DISH DBS's 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 of this Annual Report on Form 10-K, DISH DBS was in compliance
with the covenants.
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
Contractual Obligations and Off-Balance Sheet Arrangements
As of December 31, 2012, future maturities of our long-term debt, capital lease
and contractual obligations are summarized as follows:
Payments due by period
Total 2013 2014 2015 2016 2017 Thereafter
(In thousands)
Long-term debt
obligations $ 11,638,955 $ 508,186 $ 1,007,851 $ 758,232 $ 1,506,742 $ 906,975 $ 6,950,969
Capital lease
obligations 249,145 29,515 26,672 27,339 30,024 32,958 102,637
Interest expense on
long-term debt and
capital lease
obligations 4,918,951 774,373 732,260 634,705 549,420 493,257 1,734,936
Satellite-related
obligations 2,259,436 355,154 321,479 301,109 253,144 242,777 785,773
Operating lease
obligations (1) 245,630 85,482 51,499 32,055 22,878 8,541 45,175
Purchase obligations
(1) 3,508,013 1,810,364 520,462 436,396 314,589 165,059 261,143
Total $ 22,820,130 $ 3,563,074 $ 2,660,223 $ 2,189,836 $ 2,676,797 $ 1,849,567 $ 9,880,633
--------------------------------------------------------------------------------
(1) Contractual obligations related to Blockbuster UK are not included
above. Our Blockbuster UK Operating Entities entered into Administration in the
United Kingdom on January 16, 2013, as discussed in Note 10 in the Notes to our
Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K.
In certain circumstances the dates on which we are obligated to make these
payments could be delayed. These amounts will increase to the extent we procure
insurance for our satellites or contract for the construction, launch or lease
of additional satellites.
78
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
In addition, the table above does not include $347 million of liabilities
associated with unrecognized tax benefits which were accrued, as discussed in
Note 12 in the Notes to our Consolidated Financial Statements in Item 15 of this
Annual Report on Form 10-K, and are included on our Consolidated Balance Sheets
as of December 31, 2012. We do not expect any portion of this amount to be paid
or settled within the next twelve months.
Other than the "Guarantees" disclosed in Note 16 in the Notes to our
Consolidated Financial Statements in Item 15 of this Annual Report on Form 10-K,
we generally do not engage in off-balance sheet financing activities.
Satellites Under Construction
EchoStar XVIII
On September 7, 2012, we entered into a contract with SS/L for the construction
of EchoStar XVIII, a DBS satellite designed with spot beam technology for
advanced television services such as HD programming. This satellite is expected
to be launched during 2015. Future commitments related to this satellite are
included in the table above under "Satellite related obligations," except where
noted below. As of December 31, 2012, we had not procured a launch contract and
launch insurance for this satellite; therefore, these costs are not included in
our satellite-related obligations in the table above.
Satellite Insurance
We generally do not carry commercial insurance for any of the in-orbit
satellites that we use, other than certain satellites leased from third
parties. We generally do not use commercial insurance to mitigate the potential
financial impact of launch or in-orbit failures because we believe that the cost
of insurance premiums is uneconomical relative to the risk of such failures.
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.
Purchase Obligations
Our 2013 purchase obligations primarily consist of binding purchase orders for
receiver systems and related equipment, digital broadcast operations, satellite
and transponder leases, engineering, and for products and services related to
the operation of our DISH branded pay-TV service. Our purchase obligations also
include certain guaranteed fixed contractual commitments to purchase programming
content. Our purchase obligations can fluctuate significantly from period to
period due to, among other things, management's control of inventory levels, and
can materially impact our future operating asset and liability balances, and our
future working capital requirements.
Programming Contracts
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. These
programming commitments are not included in the "Contractual obligations and
off-balance sheet arrangements" table above. The terms of our contracts
typically range from one to ten years with annual rate increases. Our
programming expenses will continue to increase to the extent we are successful
growing our subscriber base. In addition, our margins may face further downward
pressure from price increases and the renewal of long term programming contracts
on less favorable pricing terms.
Future Capital Requirements
We expect to fund our future working capital, capital expenditure and debt
service requirements from cash generated from operations, existing cash and
marketable investment securities balances, and cash generated through raising
additional capital. The amount of capital required to fund our future working
capital and capital expenditure needs varies, depending on, among other things,
the rate at which we acquire new subscribers and the cost of subscriber
acquisition and retention, including capitalized costs associated with our new
and existing subscriber equipment
79
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
lease programs. The majority of our capital expenditures for 2013 are expected
to be driven by the costs associated with subscriber premises equipment,
included in our firm purchase obligations, as well as capital expenditures for
our satellite-related obligations. These expenditures are necessary to operate
and maintain our pay-TV service. Consequently, we consider them to be
non-discretionary. The amount of capital required will also depend on the
levels of investment necessary to support potential strategic initiatives,
including our plans to expand our national HD offerings and other strategic
opportunities that may arise from time to time. Our capital expenditures vary
depending on the number of satellites leased or under construction at any point
in time, and could increase materially as a result of increased competition,
significant satellite failures, or sustained economic weakness. These factors
could require that we raise additional capital in the future.
Volatility in the financial markets has made it more difficult at times for
issuers of high-yield indebtedness, such as us, to access capital markets at
acceptable terms. These developments may have a significant effect on our cost
of financing and our liquidity position.
Wireless Spectrum
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 completed 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 but did not
initially act on our request for waiver of the various technical provisions. On
March 21, 2012, the FCC released a Notice of Proposed Rule Making ("NPRM")
proposing the elimination of the integrated service, spare satellite and various
technical requirements attached to the 2 GHz licenses. On December 11, 2012,
the FCC approved rules that eliminated these requirements and gave notice of its
proposed modification of our 2 GHz authorizations to, among other things, allow
us to offer single-mode terrestrial terminals to customers who do not desire
satellite functionality. On February 15, 2013, the FCC issued an order, which
will become effective on March 7, 2013, modifying our 2 GHz licenses to add
terrestrial operating authority. The FCC's order of modification has imposed
certain limitations on the use of a portion of this spectrum, including
interference protections for other spectrum users and power and emission limits
that we presently believe could render 5 MHz of our uplink spectrum effectively
unusable for terrestrial services and limit our ability to fully utilize the
remaining 15 MHz of our uplink spectrum for terrestrial services. These
limitations could, among other things, impact the finalization of technical
standards associated with our wireless business, and may have a material adverse
effect on our ability to commercialize these licenses. The new rules also
mandate certain interim and final build-out requirements for the licenses. By
March 2017, we must provide terrestrial signal coverage and offer terrestrial
service to at least 40% of the aggregate population represented by all of the
areas covered by the licenses (the "2 GHz Interim Build-out Requirement"). By
March 2020, we must provide terrestrial signal coverage and offer terrestrial
service to at least 70% of the population in each area covered by an individual
license (the "2 GHz Final Build-out Requirement"). If we fail to meet the 2 GHz
Interim Build-out Requirement, the 2 GHz Final Build-out Requirement will be
accelerated by one year, from March 2020 to March 2019. If we fail to meet the
2 GHz Final Build-out Requirement, our terrestrial authorization for each
license area in which we fail to meet the requirement will terminate. In
addition, the FCC is currently considering rules for a spectrum band that is
adjacent to our 2 GHz licenses, known as the "H Block." If the FCC adopts
rules for the H block that do not adequately protect our 2 GHz licenses, there
could be a material adverse effect on our ability to commercialize the 2 GHz
licenses.
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,
build-out, and
80
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
integration efforts, any such investment or partnership could vary
significantly. Additionally, recent consolidation in the wireless
telecommunications industry, may, among other things, limit our available
options, including our ability to partner with others. 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 licenses or that we will be able to
profitably deploy the assets represented by these spectrum licenses, which may
affect the carrying value of these assets and our future financial condition or
results of operations.
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. These licenses
mandate certain interim and final build-out requirements. By June 2013, we must
provide signal coverage and offer service to at least 35% of the geographic area
in each area covered by each individual license (the "700 MHz Interim Build-out
Requirement"). By the end of our license term (June 2019), we must provide
signal coverage and offer service to at least 70% of the geographic area in each
area covered by each individual license (the "700 MHz Final Build-out
Requirement"). We have recently notified the FCC of our plans to commence
signal coverage in select cities within certain of these areas, but we have not
yet developed plans for providing signal coverage and offering service in all of
these areas. If we fail to meet the 700 MHz Interim Build-out Requirement, the
term of our licenses will be reduced, from June 2019 to June 2017, and we could
face possible fines and the reduction of license area(s). If we fail to meet
the 700 MHz Final Build-out Requirement, our authorization for each license area
in which we fail to meet the requirement will terminate. 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.
Depending on the nature and scope of such commercialization and build-out, any
such investment or partnership could vary significantly.
We have recently been engaged in discussions regarding a potential strategic
transaction with Clearwire. On January 8, 2013, Clearwire issued a press
release summarizing the proposed transaction at that time. Later that day, we
confirmed that we had formally approached Clearwire with respect to a potential
strategic transaction on the terms and conditions generally outlined in
Clearwire's press release. The terms and conditions for a potential strategic
transaction at that time disclosed by Clearwire generally provided for the
following, among others: (i) we would acquire approximately 24% of Clearwire's
total spectrum, for approximately $2.2 billion; and (ii) we would make an offer
to purchase up to all of Clearwire's outstanding shares at a price of $3.30 per
share in cash. This offer would be subject to certain conditions, including that
we acquire no less than 25% of the fully-diluted shares of Clearwire and receive
certain governance and minority protection rights. There is no assurance that we
will continue discussions with Clearwire or that we will ultimately be able to
conclude a transaction with Clearwire upon the terms outlined above or at all.
To the extent that we are able to conclude a transaction with Clearwire, we may
be required to commit a significant portion of our cash and marketable
securities to fund these arrangements, and these commitments may cause us to
defer or curtail investments in our core business, strategic investments, share
repurchases or other transactions that we otherwise may have made. Furthermore,
Clearwire has experienced significant operating and financial challenges in its
recent history. Therefore, any investment we may make in Clearwire will be
speculative, and we may lose all of the investment. In addition, we may be
required to spend additional capital or raise additional capital to support an
investment in Clearwire's business and to build out a network to utilize the
spectrum acquired, which may not be available on acceptable terms or at all.
There can be no assurance that we will be able to develop and implement a
business model that will realize a return on a possible transaction with
Clearwire or that we will be able to profitably deploy the spectrum assets,
which may affect the carrying value of these assets and our future financial
condition or results of operations. If we are unable to successfully address
these challenges and risks, our business, financial condition or results of
operations will likely suffer.
Critical Accounting Estimates
The preparation of the consolidated financial statements in conformity with GAAP
requires management to make estimates, judgments and assumptions that affect
amounts reported therein. Management bases its estimates, judgments and
assumptions on historical experience and on various other factors that are
believed to be reasonable under the circumstances. Actual results may differ
from previously estimated amounts, and such differences may be material to the
Consolidated Financial Statements. Estimates and assumptions are reviewed
periodically, and the effects of revisions are reflected prospectively in the
period they occur. The following represent what we believe are the critical
accounting policies that may involve a high degree of estimation, judgment and
complexity. For a summary
81
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
of our significant accounting policies, including those discussed below, see
Note 2 in the Notes to our Consolidated Financial Statements in Item 15 of this
Annual Report on Form 10-K.
† Capitalized satellite receivers. Since we retain ownership of
certain equipment provided pursuant to our subscriber equipment lease programs,
we capitalize and depreciate equipment costs that would otherwise be expensed at
the time of sale. Such capitalized costs are depreciated over the estimated
useful life of the equipment, which is based on, among other things,
management's judgment of the risk of technological obsolescence. Because of the
inherent difficulty of making this estimate, the estimated useful life of
capitalized equipment may change based on, among other things, historical
experience and changes in technology as well as our response to competitive
conditions. Changes in estimated useful life may impact "Depreciation and
amortization" on our Consolidated Statements of Operations and Comprehensive
Income (Loss). For example, if we had decreased the estimated useful life of
our capitalized subscriber equipment by one year, annual 2012 depreciation
expense would have increased by approximately $84 million.
† Accounting for investments in private and publicly-traded
securities. We hold debt and equity interests in companies, some of which are
publicly traded and have highly volatile prices. We record an investment
impairment charge in "Other, net" within "Other Income (Expense)" on our
Consolidated Statements of Operations and Comprehensive Income (Loss) when we
believe an investment has experienced a decline in value that is judged to be
other-than-temporary. We monitor our investments for impairment by considering
current factors including economic environment, market conditions and the
operational performance and other specific factors relating to the business
underlying the investment. Future adverse changes in these factors could result
in losses or an inability to recover the carrying value of the investments that
may not be reflected in an investment's current carrying value, thereby possibly
requiring an impairment charge in the future.
† Fair value of financial instruments. Fair value estimates of our
financial instruments are made at a point in time, based on relevant market data
as well as the best information available about the financial instrument.
Sustained economic weakness has resulted in inactive markets for certain of our
financial instruments, including our Auction Rate Securities ("ARS") and other
investment securities. For certain of these instruments, there is no or limited
observable market data. Fair value estimates for financial instruments for
which no or limited observable market data is available are based on judgments
regarding current economic conditions, liquidity discounts, currency, credit and
interest rate risks, loss experience and other factors. These estimates involve
significant uncertainties and judgments and may be a less precise measurement of
fair value as compared to financial instruments where observable market data is
available. We make certain assumptions related to expected maturity date,
credit and interest rate risk based upon market conditions and prior
experience. As a result, such calculated fair value estimates may not be
realizable in a current sale or immediate settlement of the instrument. In
addition, changes in the underlying assumptions used in the fair value
measurement technique, including liquidity risks, and estimate of future cash
flows, could significantly affect these fair value estimates, which could have a
material adverse impact on our financial position and results of operations.
For example, as of December 31, 2012, we held $106 million of securities that
lack observable market quotes, and a 10% decrease in our estimated fair value of
these securities would result in a decrease of the reported amount by
approximately $11 million.
† Valuation of long-lived assets. We evaluate the carrying value of
long-lived assets to be held and used, other than goodwill and intangible assets
with indefinite lives, when events and circumstances warrant such a review. We
evaluate our DBS satellite fleet for recoverability as one asset group. See
Note 2 in the Notes to our Consolidated Financial Statements in Item 15 of this
Annual Report on Form 10-K. The carrying value of a long-lived asset or asset
group is considered impaired when the anticipated undiscounted cash flows from
such asset or asset group is less than its carrying value. In that event, a
loss will be recorded in a new line item entitled "Impairments of
indefinite-lived and long-lived assets" on our Consolidated Statements of
Operations and Comprehensive Income (Loss) based on the amount by which the
carrying value exceeds the fair value of the long-lived asset or asset group.
Fair value is determined primarily using the estimated cash flows associated
with the asset or asset group under review, discounted at a rate commensurate
with the risk involved. Losses on long-lived assets to be disposed of by sale
are determined in a similar manner, except that fair values are reduced for
estimated selling costs. Among other reasons, changes in estimates of future
cash flows could result in a write-down of the asset in a future period.
82
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
† Valuation of intangible assets with indefinite lives. We evaluate
the carrying value of intangible assets with indefinite lives annually, and also
when events and circumstances warrant. We use estimates of fair value to
determine the amount of impairment, if any, of recorded intangible assets with
indefinite lives. Fair value is determined using the estimated future cash
flows, discounted at a rate commensurate with the risk involved or the market
approach. While our impairment tests in 2012 indicated the fair value of our
intangible assets exceeded their carrying amounts, significant changes in our
estimates of future cash flows or market data could result in a write-down of
intangible assets with indefinite lives in a future period, which will be
recorded in a new line item entitled "Impairments of indefinite-lived and
long-lived assets," on our Consolidated Statements of Operations and
Comprehensive Income (Loss) and could be material to our consolidated results of
operations and financial position. Based on the methodology utilized to test
for impairment a 10% decrease in the estimated future cash flows or market value
of comparable assets and/or, a 10% increase in the discount rate used in
estimating the fair value of these assets (while all other assumptions remain
unchanged) would not result in these assets being impaired.
† Income taxes. Our income tax policy is to record the estimated
future tax effects of temporary differences between the tax bases of assets and
liabilities and amounts reported in the accompanying consolidated balance
sheets, as well as operating loss and tax credit carryforwards. Determining
necessary valuation allowances requires us to make assessments about the timing
of future events, including the probability of expected future taxable income
and available tax planning opportunities. We periodically evaluate our need for
a valuation allowance based on both historical evidence, including trends, and
future expectations in each reporting period. Any such valuation allowance is
recorded in either "Income tax (provision) benefit, net" on our Consolidated
Statements of Operations and Comprehensive Income (Loss) or "Accumulated other
comprehensive income (loss)" within "Stockholders' equity (deficit)" on our
Consolidated Balance Sheets. Future performance could have a significant effect
on the realization of tax benefits, or reversals of valuation allowances, as
reported in our consolidated results of operations.
† Uncertainty in tax positions. Management evaluates the recognition
and measurement of uncertain tax positions based on applicable tax law,
regulations, case law, administrative rulings and pronouncements and the facts
and circumstances surrounding the tax position. Changes in our estimates
related to the recognition and measurement of the amount recorded for uncertain
tax positions could result in significant changes in our "Income tax provision
(benefit), net," which could be material to our consolidated results of
operations.
† Contingent liabilities. A significant amount of management judgment
is required in determining when, or if, an accrual should be recorded for a
contingency and the amount of such accrual. Estimates generally are developed
in consultation with counsel and are based on an analysis of potential
outcomes. Due to the uncertainty of determining the likelihood of a future
event occurring and the potential financial statement impact of such an event,
it is possible that upon further development or resolution of a contingent
matter, a charge could be recorded in a future period to "General and
administrative expenses" or "Litigation expense" on our Consolidated Statements
of Operations and Comprehensive Income (Loss) that would be material to our
consolidated results of operations and financial position.
† Business combinations. When we acquire a business, we allocate the
purchase price to the various components of the acquisition based upon the fair
value of each component using various valuation techniques, including the market
approach, income approach and/or cost approach. The accounting standard for
business combinations requires most identifiable assets, liabilities,
noncontrolling interests and goodwill acquired to be recorded at estimated fair
value. Determining the fair value of assets acquired and liabilities assumed
requires management's judgment and often involves the use of significant
estimates and assumptions, including assumptions with respect to the estimated
future cash flows, discounted at a rate commensurate with the risk involved or
the market approach.
83
-------------------------------------------------------------------------------- Table of Contents
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS - Continued
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
cannot provide assurance that this will continue in the future.
Inflation
Inflation has not materially affected our operations during the past three
years. We believe that our ability to increase the prices charged for our
products and services in future periods will depend primarily on competitive
pressures.
Backlog
We do not have any material backlog of our products.
84
-------------------------------------------------------------------------------- Table of Contents
[ Back To Contact Center Solutions Homepage's Homepage ]
|
MetricNet Publishes 4 New Australian Benchmarks for IT Support, Contact Centres 
Part 1: Home Agents: The Big Game Changer [white paper]
