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As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 11/06/23 DISH Network Corp. 10-Q 9/30/23 77:16M Toppan Merrill Bridge/FA |
Document/Exhibit Description Pages Size
1: 10-Q Quarterly Report HTML 4.49M
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form i 10-Q
(Mark One)
i ☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED i SEPTEMBER 30, 2023.
OR
i ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
Commission File Number: i 001-39144
i DISH Network Corporation
(Exact name of registrant as specified in its charter)
| | |
i Nevada | | i 88-0336997 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
i 9601 South Meridian Boulevard | | |
i Englewood, i Colorado | | i 80112 |
(Address of principal executive offices) | | (Zip code) |
( i 303) i 723-1000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | |||
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
i Class A common stock, $0.01 par value | | i DISH | | The i Nasdaq Stock Market L.L.C. |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. i Yes ⌧ No ◻
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). i Yes ⌧ No ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | |
i Large accelerated filer ☒ | | Accelerated filer ☐ |
| | |
Non-accelerated filer ☐ | | Smaller reporting company i ☐ Emerging growth company i ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i ☐ No ☒
As of October 25, 2023, the registrant’s outstanding common stock consisted of i 295,954,906 shares of Class A common stock and i 238,435,208 shares of Class B common stock.
| | |
| i | |
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| 1 | |
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| Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) | 2 |
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| Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit) | 3 |
| | |
| 5 | |
| | |
| 6 | |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations | 68 | |
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106 | ||
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106 | ||
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106 | ||
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106 | ||
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115 | ||
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Item 3. | Defaults Upon Senior Securities | None |
| | |
Item 4. | Mine Safety Disclosures | None |
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116 | ||
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116 | ||
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| 117 | |
PART I — FINANCIAL INFORMATION
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
Unless otherwise required by the context, in this report, the words “DISH Network,” the “Company,” “we,” “our” and “us” refer to DISH Network Corporation and its subsidiaries, “EchoStar” refers to EchoStar Corporation and its subsidiaries, and “DISH DBS” refers to DISH DBS Corporation, a wholly-owned, indirect subsidiary of DISH Network, and its subsidiaries.
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, including, in particular, statements about our plans, objectives and strategies, growth opportunities in our industries and businesses, our expectations regarding future results, financial condition, liquidity and capital requirements, our estimates regarding the impact of regulatory developments and legal proceedings, and other trends and projections. Forward-looking statements are not historical facts and may be identified by words such as “future,” “anticipate,” “intend,” “plan,” “goal,” “seek,” “believe,” “estimate,” “expect,” “predict,” “will,” “would,” “could,” “can,” “may,” and similar terms. These forward-looking statements are based on information available to us as of the date of this Quarterly Report on Form 10-Q and represent management’s current views and assumptions. Forward-looking statements are not guarantees of future performance, events or results and involve known and unknown risks, uncertainties and other factors, which may be beyond our control. Accordingly, actual performance, events or results could differ materially from those expressed or implied in the forward-looking statements due to a number of factors, including, but not limited to, those summarized below:
SUMMARY OF RISK FACTORS
Competition and Economic Risks
| ● | We face intense and increasing competition from providers of video, broadband and/or wireless services, which may require us to further increase subscriber acquisition and retention spending or accept lower subscriber activations and higher subscriber churn. |
| ● | Changing consumer behavior and new technologies in our Pay-TV business may reduce our subscriber activations and may cause our subscribers to purchase fewer services from us or to cancel our services altogether, resulting in less revenue to us. |
| ● | We face certain risks competing in the wireless services industry and operating a facilities-based wireless services business. |
| ● | Our pay-TV competitors may be able to leverage their relationships with programmers to reduce their programming costs and/or offer exclusive content that will place them at a competitive advantage to us. |
| ● | Through the MNSA and the NSA, we depend on T-Mobile and AT&T in providing network services to our Wireless subscribers. Our failure to effectively manage these relationships, including without limitation, our minimum commitments, any system failure in their wireless networks, interruption in the services provided to us, and/or the termination of the MNSA or the NSA could have a material adverse effect on our business, financial condition and results of operations. |
| ● | Changes in how network operators handle and charge for access to data that travels across their networks could adversely impact our Pay-TV business. |
| ● | Economic weakness and uncertainty may adversely affect our ability to grow or maintain our business. |
COVID-19 Pandemic
| ● | The COVID-19 pandemic and its impact on the economic environment generally, and on us specifically, have adversely impacted our business. Furthermore, any continuation or worsening of the pandemic and the economic environment could have a material adverse effect on our business, financial condition and results of operations. |
i
Operational and Service Delivery Risks
| ● | Any deterioration in our operational performance and subscriber satisfaction could adversely affect our business, financial condition and results of operations. |
| ● | If our subscriber activations decrease, or if our subscriber churn rate, subscriber acquisition costs or retention costs increase, our financial performance will be adversely affected. |
| ● | With respect to our Pay-TV business, programming expenses are increasing, which may adversely affect our future financial condition and results of operations. |
| ● | We depend on others to provide the programming that we offer to our Pay-TV subscribers and, if we fail to obtain or lose access to certain programming, our Pay-TV subscriber activations and our subscriber churn rate may be negatively impacted. |
| ● | We may not be able to obtain necessary retransmission consent agreements at acceptable rates, or at all, from local network stations. |
| ● | We have experienced and may continue to experience cyber-attacks or other malicious activities that disrupted or may continue to disrupt our business and any future failure or disruption of our information technology infrastructure and communications systems or those of third parties that we use in our operations, could harm our business. |
| ● | Extreme weather may result in risk of damage to our infrastructure and therefore our ability to provide services, and may lead to changes in federal, state and foreign government regulation, all of which could materially and adversely affect our business, results of operations and financial condition. |
| ● | Our failure to effectively invest in, introduce, and implement new competitive products and services could cause our products and services to become obsolete and could negatively impact our business. |
| ● | We rely on a single vendor or a limited number of vendors to provide certain key products or services to us, and the inability of these key vendors to meet our needs could have a material adverse effect on our business. |
| ● | We depend on independent third parties to solicit orders for our services that represent a meaningful percentage of our total gross new subscriber activations. |
| ● | We have limited satellite capacity and failures or reduced capacity could adversely affect our business, financial condition and results of operations. |
| ● | We may have potential conflicts of interest with EchoStar due to our common ownership and management. |
| ● | We rely on highly skilled personnel for our business, and any inability to hire and retain key personnel or hire qualified personnel may negatively affect our business, financial condition and results of operations. |
| ● | Changes in levels of U.S. government spending or overall spending priorities could impact, among other things, our business, financial condition and results of operations. |
Acquisition and Capital Structure Risks
| ● | We have made substantial investments to acquire certain wireless spectrum licenses and other related assets, and we may be unable to realize a return on these assets. |
| ● | We have made substantial noncontrolling investments in the Northstar Entities and the SNR Entities related to AWS-3 wireless spectrum licenses, and we may be unable to obtain a profitable return on these investments. |
| ● | We may pursue acquisitions and other strategic transactions to complement or expand our business that may not be successful, and we may lose up to the entire value of our investment in these acquisitions and transactions. |
| ● | We have substantial debt outstanding and may incur additional debt. |
| ● | We will need additional capital, which may not be available on favorable terms, to continue investing in our business and to finance acquisitions and other strategic transactions. |
ii
| ● | The conditional conversion features of our 3 3/8% Convertible Notes due 2026 (the “Convertible Notes due 2026”), our 2 3/8% Convertible Notes due 2024 (the “Convertible Notes due 2024”) and 0% Convertible Notes due 2025 (the “Convertible Notes due 2025,” and collectively with the Convertible Notes due 2026 and the Convertible Notes due 2024, the “Convertible Notes”), if triggered, may adversely affect our financial condition. |
| ● | The convertible note hedge and warrant transactions that we entered into in connection with the offering of the Convertible Notes due 2026 may affect the value of the Convertible Notes due 2026 and our Class A common stock. |
| ● | We are subject to counterparty risk with respect to the convertible note hedge transactions. |
| ● | From time to time, a portion of our investment portfolio may be invested in securities that have limited liquidity and may not be immediately accessible to support our financing needs. |
| ● | We are controlled by one principal stockholder who is also our Chairman. |
Legal and Regulatory Risks
| ● | Our business depends on certain intellectual property rights and on not infringing the intellectual property rights of others. |
| ● | We are, and may become, party to various lawsuits which, if adversely decided, could have a significant adverse impact on our business, particularly lawsuits regarding intellectual property. |
| ● | Our services depend on Federal Communications Commission (“FCC”) licenses that can expire or be revoked or modified and applications for FCC licenses that may not be granted. |
| ● | If our internal controls are not effective, our business, our stock price and our investor confidence in our financial results may be adversely affected. |
| ● | We may face other risks described from time to time in periodic and current reports we file with the Securities and Exchange Commission (“SEC”). |
Risks Related to the Merger with EchoStar
| ● | We and EchoStar will be subject to a number of risks while the Merger remains pending, which may have an adverse effect on our respective businesses, and we and EchoStar may not realize the anticipated benefits of the Merger within expected timeframes or at all. |
Other factors that could cause or contribute to such differences include, but are not limited to, those discussed under the caption “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q and in Part I, Item 1A of our most recent Annual Report on Form 10-K (the “10-K”) filed with the SEC, those discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein and in the 10-K and those discussed in other documents we file with the SEC. All cautionary statements made or referred to herein should be read as being applicable to all forward-looking statements wherever they appear. Investors should consider the risks and uncertainties described or referred to herein and should not place undue reliance on any forward-looking statements. The forward-looking statements speak only as of the date made, and we expressly disclaim any obligation to update these forward-looking statements.
iii
Item 1. FINANCIAL STATEMENTS
DISH NETWORK CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
(Unaudited)
| | | | | | | |
| | As of | | ||||
| | September 30, | | | |||
| | 2023 |
| 2022 |
| ||
Assets | | | | | | | |
Current Assets: | | | | | | | |
Cash and cash equivalents | | $ | i 851,966 | | $ | i 1,785,056 | |
Marketable investment securities | | | i 182,816 | | | i 835,983 | |
Trade accounts receivable, net of allowance for credit losses of $ i 51,706 and $ i 44,431, respectively | | | i 802,598 | | | i 953,812 | |
Inventory | | | i 572,591 | | | i 502,373 | |
Other current assets | | | i 737,991 | | | i 532,886 | |
Total current assets | | | i 3,147,962 | | | i 4,610,110 | |
| | | | | | | |
Noncurrent Assets: | | | | | | | |
Restricted cash, cash equivalents and marketable investment securities | | | i 107,351 | | | i 104,614 | |
Property and equipment, net | | | i 7,224,876 | | | i 5,640,119 | |
FCC authorizations | | | i 37,817,941 | | | i 36,933,073 | |
Other investment securities | | | i 180,333 | | | i 168,200 | |
Operating lease assets | | | i 3,052,636 | | | i 2,687,522 | |
Other noncurrent assets, net | | | i 1,784,246 | | | i 1,897,815 | |
Intangible assets, net | | | i 429,329 | | | i 565,109 | |
Total noncurrent assets | | | i 50,596,712 | | | i 47,996,452 | |
Total assets | | $ | i 53,744,674 | | $ | i 52,606,562 | |
| | | | | | | |
Liabilities and Stockholders’ Equity (Deficit) | | | | | | | |
Current Liabilities: | | | | | | | |
Trade accounts payable | | $ | i 687,743 | | $ | i 924,438 | |
Deferred revenue and other | | | i 595,420 | | | i 711,474 | |
Accrued programming | | | i 1,353,379 | | | i 1,298,777 | |
Accrued interest | | | i 393,497 | | | i 258,799 | |
Other accrued expenses | | | i 1,693,777 | | | i 1,283,570 | |
Current portion of long-term debt and finance lease obligations (Note 9) | | | i 1,065,447 | | | i 1,547,190 | |
Total current liabilities | | | i 5,789,263 | | | i 6,024,248 | |
| | | | | | | |
Long-Term Obligations, Net of Current Portion: | | | | | | | |
Long-term debt and finance lease obligations, net of current portion (Note 9) | | | i 20,178,564 | | | i 19,801,948 | |
Deferred tax liabilities | | | i 5,026,019 | | | i 4,930,135 | |
Operating lease liabilities | | | i 3,096,308 | | | i 2,687,883 | |
Long-term deferred revenue and other long-term liabilities | | | i 843,296 | | | i 753,708 | |
Total long-term obligations, net of current portion | | | i 29,144,187 | | | i 28,173,674 | |
Total liabilities | | | i 34,933,450 | | | i 34,197,922 | |
| | | | | | | |
Commitments and Contingencies (Note 10) | | | | | | | |
| | | | | | | |
Redeemable noncontrolling interests (Note 2) | | | i 529,053 | | | i 464,359 | |
| | | | | | | |
Stockholders’ Equity (Deficit): | | | | | | | |
Class A common stock, $ i i 0.01 / par value, i i 1,600,000,000 / shares authorized, i 295,943,856 and i 292,660,308 shares issued and outstanding, respectively | | | i 2,959 | | | i 2,927 | |
Class B common stock, $ i i 0.01 / par value, i i 800,000,000 / shares authorized, i i 238,435,208 / shares issued and outstanding | | | i 2,384 | | | i 2,384 | |
Additional paid-in capital | | | i 4,904,145 | | | i 4,851,392 | |
Accumulated other comprehensive income (loss) | | | ( i 2,053) | | | ( i 3,029) | |
Accumulated earnings (deficit) | | | i 13,372,693 | | | i 13,088,850 | |
Total DISH Network stockholders’ equity (deficit) | | | i 18,280,128 | | | i 17,942,524 | |
Noncontrolling interests | | | i 2,043 | | | i 1,757 | |
Total stockholders’ equity (deficit) | | | i 18,282,171 | | | i 17,944,281 | |
Total liabilities and stockholders’ equity (deficit) | | $ | i 53,744,674 | | $ | i 52,606,562 | |
| | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
1
DISH NETWORK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands, except per share amounts)
(Unaudited)
| | | | | | | | | | | | |
| For the Three Months Ended | | For the Nine Months Ended | | ||||||||
| September 30, | | | |||||||||
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| ||||
Revenue: | | | | | | | | | | | | |
Service revenue | $ | i 3,588,510 | | $ | i 3,930,098 | | $ | i 11,120,673 | | $ | i 12,034,421 | |
Equipment sales and other revenue | | i 116,006 | | | i 165,353 | | | i 452,402 | | | i 601,613 | |
Total revenue | | i 3,704,516 | | | i 4,095,451 | | | i 11,573,075 | | | i 12,636,034 | |
| | | | | | | | | | | | |
Costs and Expenses (exclusive of depreciation): | | | | | | | | | | | | |
Cost of services | | i 2,242,319 | | | i 2,382,406 | | | i 6,838,688 | | | i 7,194,139 | |
Cost of sales - equipment and other | | i 566,585 | | | i 452,749 | | | i 1,561,864 | | | i 1,364,087 | |
Selling, general and administrative expenses | | i 642,621 | | | i 658,531 | | | i 1,878,068 | | | i 1,888,184 | |
Depreciation and amortization | | i 294,797 | | | i 174,736 | | | i 806,504 | | | i 519,300 | |
Total costs and expenses | | i 3,746,322 | | | i 3,668,422 | | | i 11,085,124 | | | i 10,965,710 | |
| | | | | | | | | | | | |
Operating income (loss) | | ( i 41,806) | | | i 427,029 | | | i 487,951 | | | i 1,670,324 | |
| | | | | | | | | | | | |
Other Income (Expense): | | | | | | | | | | | | |
Interest income | | i 18,649 | | | i 7,632 | | | i 90,907 | | | i 21,853 | |
Interest expense, net of amounts capitalized | | ( i 10,173) | | | ( i 4,848) | | | ( i 27,379) | | | ( i 15,067) | |
Other, net | | ( i 151,497) | | | i 57,941 | | | ( i 120,726) | | | i 114,264 | |
Total other income (expense) | | ( i 143,021) | | | i 60,725 | | | ( i 57,198) | | | i 121,050 | |
| | | | | | | | | | | | |
Income (loss) before income taxes | | ( i 184,827) | | | i 487,754 | | | i 430,753 | | | i 1,791,374 | |
Income tax (provision) benefit, net | | i 67,988 | | | ( i 58,169) | | | ( i 81,930) | | | ( i 372,936) | |
Net income (loss) | | ( i 116,839) | | | i 429,585 | | | i 348,823 | | | i 1,418,438 | |
Less: Net income (loss) attributable to noncontrolling interests, net of tax | | i 22,346 | | | i 17,355 | | | i 64,980 | | | i 50,725 | |
Net income (loss) attributable to DISH Network | $ | ( i 139,185) | | $ | i 412,230 | | $ | i 283,843 | | $ | i 1,367,713 | |
| | | | | | | | | | | | |
Weighted-average common shares outstanding - Class A and B common stock: | | | | | | | | | | | | |
Basic | | i 534,034 | | | i 530,436 | | | i 532,788 | | | i 529,870 | |
Diluted | | i 534,034 | | | i 637,455 | | | i 639,931 | | | i 637,295 | |
| | | | | | | | | | | | |
Earnings per share - Class A and B common stock: | | | | | | | | | | | | |
Basic net income (loss) per share attributable to DISH Network | $ | ( i 0.26) | | $ | i 0.78 | | $ | i 0.53 | | $ | i 2.58 | |
Diluted net income (loss) per share attributable to DISH Network | $ | ( i 0.26) | | $ | i 0.65 | | $ | i 0.44 | | $ | i 2.15 | |
| | | | | | | | | | | | |
Comprehensive Income (Loss): | | | | | | | | | | | | |
Net income (loss) | $ | ( i 116,839) | | $ | i 429,585 | | $ | i 348,823 | | $ | i 1,418,438 | |
Other comprehensive income (loss): | | | | | | | | | | | | |
Foreign currency translation adjustments | | i 573 | | | ( i 1,610) | | | i 1,303 | | | ( i 1,653) | |
Unrealized holding gains (losses) on available-for-sale debt securities | | ( i 230) | | | i 67 | | | ( i 200) | | | i 13 | |
Recognition of previously unrealized (gains) losses on available-for-sale securities included in net income (loss) | | i 230 | | | — | | | i 231 | | | i 2 | |
Deferred income tax (expense) benefit, net | | ( i 199) | | | i 120 | | | ( i 358) | | | i 133 | |
Total other comprehensive income (loss), net of tax | | i 374 | | | ( i 1,423) | | | i 976 | | | ( i 1,505) | |
Comprehensive income (loss) | | ( i 116,465) | | | i 428,162 | | | i 349,799 | | | i 1,416,933 | |
Less: Comprehensive income (loss) attributable to noncontrolling interests, net of tax | | i 22,346 | | | i 17,355 | | | i 64,980 | | | i 50,725 | |
Comprehensive income (loss) attributable to DISH Network | $ | ( i 138,811) | | $ | i 410,807 | | $ | i 284,819 | | $ | i 1,366,208 | |
| | | | | | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
2
DISH NETWORK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | |
| | |
| | | | | Accumulated | | | | | | | | | | | | | | |
| | Class A and B | | Additional | | Other | | Accumulated | | |
| | | | | Redeemable | | |||||
| | Common | | Paid-In | | Comprehensive | | Earnings | | Noncontrolling | | | | | Noncontrolling | | ||||||
|
| Stock |
| Capital |
| Income (Loss) |
| (Deficit) |
| Interests |
| Total |
| Interests |
| |||||||
Balance, December 31, 2021 | | $ | i 5,289 | | $ | i 4,735,484 | | $ | i 281 | | $ | i 10,785,617 | | $ | i 1,220 | | $ | i 15,527,891 | | $ | i 395,222 | |
Issuance of Class A common stock: | | | | | | | | | | | | | | | | | | | | | | |
Exercise of stock awards | | | i 1 | | | i 253 | | | — | | | — | | | — | | | i 254 | | | — | |
Employee Stock Purchase Plan | | | i 2 | | | i 4,360 | | | — | | | — | | | — | | | i 4,362 | | | — | |
Non-cash, stock-based compensation | | | — | | | i 15,285 | | | — | | | — | | | — | | | i 15,285 | | | — | |
Change in unrealized holding gains (losses) on available-for-sale debt securities, net | | | — | | | — | | | ( i 96) | | | — | | | — | | | ( i 96) | | | — | |
Deferred income tax (expense) benefit attributable to other comprehensive income (loss) | | | — | | | — | | | i 23 | | | — | | | — | | | i 23 | | | — | |
Foreign currency translation | | | — | | | — | | | ( i 150) | | | — | | | — | | | ( i 150) | | | — | |
Net income (loss) attributable to noncontrolling interests | | | — | | | — | | | — | | | — | | | i 159 | | | i 159 | | | i 16,036 | |
Net income (loss) attributable to DISH Network | | | — | | | — | | | — | | | i 432,651 | | | — | | | i 432,651 | | | — | |
Balance, March 31, 2022 | | $ | i 5,292 | | $ | i 4,755,382 | | $ | i 58 | | $ | i 11,218,268 | | $ | i 1,379 | | $ | i 15,980,379 | | $ | i 411,258 | |
Issuance of Class A common stock: | | | | | | | | | | | | | | | | | | | | | | |
Exercise of stock awards | | | — | | | i 56 | | | — | | | — | | | — | | | i 56 | | | — | |
Employee benefits | | | i 8 | | | i 26,318 | | | — | | | — | | | — | | | i 26,326 | | | — | |
Employee Stock Purchase Plan | | | i 2 | | | i 4,391 | | | — | | | — | | | — | | | i 4,393 | | | — | |
Non-cash, stock-based compensation | | | — | | | i 15,207 | | | — | | | — | | | — | | | i 15,207 | | | — | |
Change in unrealized holding gains (losses) on available-for-sale debt securities, net | | | — | | | — | | | i 44 | | | — | | | — | | | i 44 | | | — | |
Deferred income tax (expense) benefit attributable to other comprehensive income (loss) | | | — | | | — | | | ( i 10) | | | — | | | — | | | ( i 10) | | | — | |
Foreign currency translation | | | — | | | — | | | i 107 | | | — | | | — | | | i 107 | | | — | |
Net income (loss) attributable to noncontrolling interests | | | — | | | — | | | — | | | — | | | i 124 | | | i 124 | | | i 17,051 | |
Net income (loss) attributable to DISH Network | | | — | | | — | | | — | | | i 522,832 | | | — | | | i 522,832 | | | — | |
Balance, June 30, 2022 | | $ | i 5,302 | | $ | i 4,801,354 | | $ | i 199 | | $ | i 11,741,100 | | $ | i 1,503 | | $ | i 16,549,458 | | $ | i 428,309 | |
Issuance of Class A common stock: | | | | | | | | | | | | | | | | | | | | | | |
Exercise of stock awards | | | i 1 | | | — | | | — | | | — | | | — | | | i 1 | | | — | |
Employee benefits | | | — | | | i 22 | | | — | | | — | | | — | | | i 22 | | | — | |
Employee Stock Purchase Plan | | | i 4 | | | i 4,704 | | | — | | | — | | | — | | | i 4,708 | | | — | |
Non-cash, stock-based compensation | | | — | | | i 26,473 | | | — | | | — | | | — | | | i 26,473 | | | — | |
Change in unrealized holding gains (losses) on available-for-sale debt securities, net | | | — | | | — | | | i 67 | | | — | | | — | | | i 67 | | | — | |
Deferred income tax (expense) benefit attributable to other comprehensive income (loss) | | | — | | | — | | | i 120 | | | — | | | — | | | i 120 | | | — | |
Foreign currency translation | | | — | | | — | | | ( i 1,610) | | | — | | | — | | | ( i 1,610) | | | — | |
Net income (loss) attributable to noncontrolling interests | | | — | | | — | | | — | | | — | | | i 118 | | | i 118 | | | i 17,237 | |
Net income (loss) attributable to DISH Network | | | — | | | — | | | — | | | i 412,230 | | | — | | | i 412,230 | | | — | |
Balance, September 30, 2022 | | $ | i 5,307 | | $ | i 4,832,553 | | $ | ( i 1,224) | | $ | i 12,153,330 | | $ | i 1,621 | | $ | i 16,991,587 | | $ | i 445,546 | |
| | | | | | | | | | | | | | | | | | | | | | |
3
DISH NETWORK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) - Continued
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | Accumulated | | | | | | | | | | | | | | |
| | Class A and B | | Additional | | Other | | Accumulated | | | | | | | | Redeemable | | |||||
| | Common | | Paid-In | | Comprehensive | | Earnings | | Noncontrolling | | | | | Noncontrolling | | ||||||
| | Stock | | Capital | | Income (Loss) | | (Deficit) | | Interests | | Total | | Interests | | |||||||
Balance, December 31, 2022 | | $ | i 5,311 | | $ | i 4,851,392 | | $ | ( i 3,029) | | $ | i 13,088,850 | | $ | i 1,757 | | $ | i 17,944,281 | | $ | i 464,359 | |
Issuance of Class A common stock: | | | | | | | | | | | | | | | | | | | | | | |
Exercise of stock awards | | | — | | | ( i 386) | | | — | | | — | | | — | | | ( i 386) | | | — | |
Employee Stock Purchase Plan | | | i 4 | | | i 3,249 | | | — | | | — | | | — | | | i 3,253 | | | — | |
Non-cash, stock-based compensation | | | — | | | i 12,037 | | | — | | | — | | | — | | | i 12,037 | | | — | |
Change in unrealized holding gains (losses) on available-for-sale debt securities, net | | | — | | | — | | | ( i 25) | | | — | | | — | | | ( i 25) | | | — | |
Deferred income tax (expense) benefit attributable to other comprehensive income (loss) | | | — | | | — | | | ( i 126) | | | — | | | — | | | ( i 126) | | | — | |
Foreign currency translation | | | — | | | — | | | i 632 | | | — | | | — | | | i 632 | | | — | |
Net income (loss) attributable to noncontrolling interests | | | — | | | — | | | — | | | — | | | i 127 | | | i 127 | | | i 20,405 | |
Net income (loss) attributable to DISH Network | | | — | | | — | | | — | | | i 222,705 | | | — | | | i 222,705 | | | — | |
Balance, March 31, 2023 | | $ | i 5,315 | | $ | i 4,866,292 | | $ | ( i 2,548) | | $ | i 13,311,555 | | $ | i 1,884 | | $ | i 18,182,498 | | $ | i 484,764 | |
Issuance of Class A common stock: | | | | | | | | | | | | | | | | | | | | | | |
Exercise of stock awards | | | i 6 | | | ( i 36) | | | — | | | — | | | — | | | ( i 30) | | | — | |
Employee benefits | | | i 11 | | | i 14,660 | | | — | | | — | | | — | | | i 14,671 | | | — | |
Employee Stock Purchase Plan | | | i 6 | | | i 3,310 | | | — | | | — | | | — | | | i 3,316 | | | — | |
Non-cash, stock-based compensation | | | — | | | i 9,894 | | | — | | | — | | | — | | | i 9,894 | | | — | |
Change in unrealized holding gains (losses) on available-for-sale debt securities, net | | | — | | | — | | | i 56 | | | — | | | — | | | i 56 | | | — | |
Deferred income tax (expense) benefit attributable to other comprehensive income (loss) | | | — | | | — | | | ( i 33) | | | — | | | — | | | ( i 33) | | | — | |
Foreign currency translation | | | — | | | — | | | i 98 | | | — | | | — | | | i 98 | | | — | |
Net income (loss) attributable to noncontrolling interests | | | — | | | — | | | — | | | — | | | i 79 | | | i 79 | | | i 22,023 | |
Net income (loss) attributable to DISH Network | | | — | | | — | | | — | | | i 200,323 | | | — | | | i 200,323 | | | — | |
Balance, June 30, 2023 | | $ | i 5,338 | | $ | i 4,894,120 | | $ | ( i 2,427) | | $ | i 13,511,878 | | $ | i 1,963 | | $ | i 18,410,872 | | $ | i 506,787 | |
Issuance of Class A common stock: | | | | | | | | | | | | | | | | | | | | | | |
Exercise of stock awards | | | — | | | ( i 55) | | | — | | | — | | | — | | | ( i 55) | | | — | |
Employee benefits | | | — | | | i 9 | | | — | | | — | | | — | | | i 9 | | | — | |
Employee Stock Purchase Plan | | | i 5 | | | i 2,514 | | | — | | | — | | | — | | | i 2,519 | | | — | |
Non-cash, stock-based compensation | | | — | | | i 7,557 | | | — | | | — | | | — | | | i 7,557 | | | — | |
Deferred income tax (expense) benefit attributable to other comprehensive income (loss) | | | — | | | — | | | ( i 199) | | | — | | | — | | | ( i 199) | | | — | |
Foreign currency translation | | | — | | | — | | | i 573 | | | — | | | — | | | i 573 | | | — | |
Net income (loss) attributable to noncontrolling interests | | | — | | | — | | | — | | | — | | | i 80 | | | i 80 | | | i 22,266 | |
Net income (loss) attributable to DISH Network | | | — | | | — | | | — | | | ( i 139,185) | | | — | | | ( i 139,185) | | | — | |
Balance, September 30, 2023 | | $ | i 5,343 | | $ | i 4,904,145 | | $ | ( i 2,053) | | $ | i 13,372,693 | | $ | i 2,043 | | $ | i 18,282,171 | | $ | i 529,053 | |
| | | | | | | | | | | | | | | | | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
DISH NETWORK CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | | | | | | |
| | For the Nine Months Ended | | ||||
| | | |||||
|
| 2023 |
| 2022 |
| ||
Cash Flows From Operating Activities: | | | | | | | |
Net income (loss) |
| $ | i 348,823 | | $ | i 1,418,438 | |
Adjustments to reconcile net income (loss) to net cash flows from operating activities: | | | | | | | |
Depreciation and amortization | | | i 806,504 | | | i 519,300 | |
Realized and unrealized losses (gains) on investments, derivatives and other | | | i 118,109 | | | ( i 117,382) | |
Non-cash, stock-based compensation | | | i 29,488 | | | i 56,965 | |
Deferred tax expense (benefit) | | | i 95,526 | | | i 351,640 | |
Changes in allowance for credit losses | | | i 7,275 | | | ( i 1,903) | |
Change in long-term deferred revenue and other long-term liabilities | | | i 18,786 | | | i 47,666 | |
Other, net | | | i 129,637 | | | i 182,127 | |
Changes in current assets and current liabilities, net | | | i 163,948 | | | ( i 315,348) | |
Net cash flows from operating activities | | | i 1,718,096 | | | i 2,141,503 | |
| | | | | | | |
Cash Flows From Investing Activities: | | | | | | | |
Purchases of marketable investment securities | | | ( i 1,368,964) | | | ( i 125,532) | |
Sales and maturities of marketable investment securities | | | i 1,942,010 | | | i 2,984,627 | |
Purchases of property and equipment | | | ( i 2,326,883) | | | ( i 1,831,146) | |
Capitalized interest related to FCC authorizations (Note 2) | | | ( i 747,743) | | | ( i 756,289) | |
Purchases of FCC authorizations, including deposits | | | ( i 1,802) | | | ( i 7,206,865) | |
Other, net | | | i 5,115 | | | i 5,219 | |
Net cash flows from investing activities | | | ( i 2,498,267) | | | ( i 6,929,986) | |
| | | | | | | |
Cash Flows From Financing Activities: | | | | | | | |
Repayment of long-term debt and finance lease obligations | | | ( i 95,789) | | | ( i 64,564) | |
Redemption and repurchases of senior notes | | | ( i 1,451,250) | | | ( i 2,000,000) | |
Proceeds from issuance of senior notes | | | i 1,500,000 | | | — | |
Repurchases of convertible notes | | | ( i 182,834) | | | — | |
Early debt extinguishment gains (losses) | | | i 72,566 | | | ( i 1,138) | |
Net proceeds from Class A common stock options exercised and stock issued under the Employee Stock Purchase Plan | | | i 8,617 | | | i 13,774 | |
Debt issuance costs and debt (discount) premium | | | i 21,635 | | | — | |
Other, net | | | ( i 4,670) | | | ( i 8,667) | |
Net cash flows from financing activities | | | ( i 131,725) | | | ( i 2,060,595) | |
| | | | | | | |
Net increase (decrease) in cash, cash equivalents, restricted cash and cash equivalents | | | ( i 911,896) | | | ( i 6,849,078) | |
Cash, cash equivalents, restricted cash and cash equivalents, beginning of period (Note 5) | | | i 1,847,981 | | | i 7,734,260 | |
Cash, cash equivalents, restricted cash and cash equivalents, end of period (Note 5) | | $ | i 936,085 | | $ | i 885,182 | |
| | | | | | | |
The accompanying notes are an integral part of these condensed consolidated financial statements.
5
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.Organization and Business Activities
Principal Business
DISH Network Corporation is a holding company. Its subsidiaries (which together with DISH Network Corporation are referred to as “DISH Network,” the “Company,” “we,” “us” and/or “our,” unless otherwise required by the context) operate i two primary business segments: (1) Pay-TV; and (2) Wireless. Our Wireless business segment consists of i two business units, Retail Wireless and 5G Network Deployment.
Pay-TV
We offer pay-TV services under the DISH® brand and the SLING® brand (collectively “Pay-TV” services). The DISH branded pay-TV service consists of, among other things, Federal Communications Commission (“FCC”) licenses authorizing us to use direct broadcast satellite (“DBS”) and Fixed Satellite Service (“FSS”) spectrum, our owned and leased satellites, receiver systems, broadcast operations, a leased fiber optic network, in-home service and call center operations, and certain other assets utilized in our operations (“DISH TV”). We also design, develop and distribute receiver systems and provide digital broadcast operations, including satellite uplinking/downlinking, transmission and other services to third-party pay-TV providers. The SLING branded pay-TV services consist of, among other things, multichannel, live-linear and on-demand streaming over-the-top (“OTT”) Internet-based domestic, international, Latino and Freestream video programming services (“SLING TV”). As of September 30, 2023, we had i 8.840 million Pay-TV subscribers in the United States, including i 6.720 million DISH TV subscribers and i 2.120 million SLING TV subscribers.
Wireless – Retail Wireless
We offer nationwide prepaid and postpaid retail wireless services to subscribers primarily under our Boost Mobile®, Boost Infinite® and Gen Mobile® brands (“Retail Wireless” services), as well as a competitive portfolio of wireless devices. Prepaid wireless subscribers generally pay in advance for monthly access to wireless talk, text, and data services. Postpaid wireless subscribers are qualified to pay after receiving wireless talk, text, and data services.
We are currently operating our Retail Wireless business unit primarily as a mobile virtual network operator (“MVNO”) as we continue our 5G Network Deployment and commercialize our 5G Network, as defined below. We are transitioning our Retail Wireless business unit to a mobile network operator (“MNO”) as our 5G Network becomes commercially available and we are currently activating subscribers onto our 5G Network. As an MVNO, today we depend on T-Mobile and AT&T to provide us with network services under the amended Master Network Services Agreement (“MNSA”) and Network Services Agreement (the “NSA”), respectively. Under the NSA, we expect AT&T will become our primary network services provider. As of September 30, 2023, we had i 7.500 million Wireless subscribers.
Other Developments
We regularly evaluate ways to enhance our business. As part of this process, we are in regular dialogue with interested parties who may assist us in accomplishing our goals, including ongoing conversations with CONX Corp. (an entity partially owned by Charles W. Ergen, our Chairman) regarding a transaction involving our Retail Wireless business unit. There can be no assurance that these discussions will lead to a transaction nor as to the structure or terms of any such transaction.
/6
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Wireless – 5G Network Deployment
We have invested a total of over $ i 30 billion in Wireless spectrum licenses, which includes over $ i 10 billion in noncontrolling investments in certain entities. The $ i 30 billion of investments related to Wireless spectrum licenses does not include $ i i 8 / billion of capitalized interest related to the carrying value of such licenses. See Note 2 and Note 10 for further information.
We will need to raise additional capital in the future, which may not be available on favorable terms, to fund the efforts described below, as well as, among other things, make any potential Northstar Re-Auction Payment. There can be no assurance that we and/or the SNR Entities will be able to profitably deploy these Wireless spectrum licenses, which may affect the carrying amount of these assets and our future financial condition or results of operations. See Note 10 for further information.
DISH Network Spectrum
We have invested a total of over $ i 30 billion to acquire certain Wireless spectrum licenses. These Wireless spectrum licenses are subject to certain interim and final build-out requirements, as well as certain renewal requirements. We plan to commercialize our Wireless spectrum licenses through the completion of the nation’s first cloud-native, Open Radio Access Network (“O-RAN”) based 5G network (our “5G Network Deployment”). We have committed to deploy a facilities-based 5G broadband network (our “5G Network”) capable of serving increasingly larger portions of the U.S. population at different deadlines, including i 20% of the U.S. population by June 2022 and i 70% of the U.S. population by June 2023. If by June 2023, we are offering 5G broadband service to at least i 50% of the U.S. population but less than i 70% of the U.S. population, the i 70% June 2023 deadline will be extended automatically to June 2025; however, as a result, we may, under certain circumstances, potentially be subject to certain penalties. On June 14, 2022, we announced we had successfully reached our i 20% population coverage requirement. In addition, we announced and certified to the FCC that as of June 14, 2023, we offer 5G broadband service to over i 73% of the U.S. population, or more than i 246 million Americans nationwide, and have deployed over i 16,000 5G cell sites. On September 29, 2023, the FCC confirmed we have met all of our June 14, 2023 band-specific 5G deployment commitments, and i two of our i three nationwide 5G commitments. The single remaining 5G commitment, that at least i 70% of the U.S. population has access to average download speeds equal to 35 Mbps, will be confirmed using the drive test methodology agreed to and approved by the FCC. We have six months from September 29, 2023 to complete this drive test. We now have the largest commercial deployment of 5G voice over new radio (“VoNR”) in the world, reaching more than i 100 million Americans in over i 60 markets, and we are launching new markets every month.
As a result of us providing 5G broadband service to over i 50% of the U.S. population by June 14, 2023, the final build-out deadlines have been extended automatically to June 14, 2025 for us to offer 5G broadband service to at least i 70% of the population in each Economic Area for the 700 MHz Licenses and AWS-4 Licenses and at least i 75% of the population in each Economic Area for the H Block Licenses.
We may need to make significant additional investments or partner with others to, among other things, continue our 5G Network Deployment and further commercialize, build-out and integrate these licenses and related assets and any additional acquired licenses and related assets, as well as to comply with regulations applicable to such licenses. Depending on the nature and scope of such activities, any such investments or partnerships could vary significantly. In addition, as we continue our 5G Network Deployment, we have and may continue to incur significant additional expenses related to, among other things, research and development, wireless testing and ongoing upgrades to the wireless network infrastructure, software and third-party integration. As a result of these investments, among other factors, we plan to raise additional capital, which may not be available on favorable terms. We may also determine that additional wireless spectrum licenses may be required for our 5G Network Deployment and to compete effectively with other wireless service providers. See Note 9 and Note 10 for further information.
7
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
DISH Network Noncontrolling Investments in the Northstar Entities and the SNR Entities Related to AWS-3 Wireless Spectrum Licenses
During 2015, through our wholly-owned subsidiaries American AWS-3 Wireless II L.L.C. (“American II”) and American AWS-3 Wireless III L.L.C. (“American III”), we initially made over $ i 10 billion in certain noncontrolling investments in Northstar Spectrum, LLC (“Northstar Spectrum”), the parent company of Northstar Wireless, L.L.C. (“Northstar Wireless,” and collectively with Northstar Spectrum, the “Northstar Entities”), and in SNR Wireless HoldCo, LLC (“SNR HoldCo”), the parent company of SNR Wireless LicenseCo, LLC (“SNR Wireless,” and collectively with SNR HoldCo, the “SNR Entities”), respectively. On October 27, 2015, the FCC granted certain AWS-3 wireless spectrum licenses (the “AWS-3 Licenses”) to Northstar Wireless and to SNR Wireless, respectively, which are recorded in “FCC authorizations” on our Condensed Consolidated Balance Sheets.
Under the applicable accounting guidance in Accounting Standards Codification 810, Consolidation (“ASC 810”), Northstar Spectrum and SNR HoldCo are considered variable interest entities (“VIEs”) and, based on the characteristics of the structure of these entities and in accordance with the applicable accounting guidance, we consolidate these entities into our financial statements. Subsequent to September 30, 2023, the FCC consented to the sale of Northstar Manager, LLC’s ownership interests in Northstar Spectrum, which we purchased for a total of approximately $ i 109 million on October 12, 2023. This purchase resulted in the elimination of all of our redeemable noncontrolling interest as it related to Northstar Spectrum as of the purchase date and we continue to consolidate the Northstar Entities as wholly-owned subsidiaries. See Note 2 for further information.
The AWS-3 Licenses are subject to certain interim and final build-out requirements, as well as certain renewal requirements. The SNR Entities may need to raise significant additional capital in the future, which may be obtained from third-party sources or from us, so that the SNR Entities may commercialize, build-out and integrate these AWS-3 Licenses, comply with regulations applicable to such AWS-3 Licenses, and make any potential SNR Re-Auction Payment for the AWS-3 licenses retained by the FCC. Depending upon the nature and scope of such commercialization, build-out and integration efforts, regulatory compliance, and potential SNR Re-Auction Payment, any loans, equity contributions or partnerships could vary significantly. There can be no assurance that we will be able to obtain a profitable return on our noncontrolling investment in the SNR Entities. See Note 10 for further information.
Recent Developments
As previously disclosed, on August 8, 2023, we entered into an Agreement and Plan of Merger (the “Original Merger Agreement”) with EchoStar and Eagle Sub Corp, a Nevada corporation and a wholly-owned subsidiary of DISH Network (“Eagle Sub”), providing for the merger of Eagle Sub with and into EchoStar, with EchoStar surviving the merger as a wholly-owned subsidiary of DISH Network. On October 2, 2023, we entered into an Amended and Restated Agreement and Plan of Merger (the “Amended Merger Agreement”) with EchoStar and EAV Corp., a Nevada corporation and a wholly-owned subsidiary of EchoStar (“Merger Sub”), which revises the structure of the merger of DISH Network and EchoStar. The Amended Merger Agreement provides, among other things, that subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will merge with and into DISH Network (the “Merger”), with DISH Network surviving the Merger as a wholly-owned subsidiary of EchoStar. Our Board of Directors, acting upon the unanimous recommendation of a special transaction committee of independent directors of our Board of Directors (the “DISH Network Special Committee”), unanimously approved, adopted and declared advisable the Amended Merger Agreement and the transactions contemplated by the Amended Merger Agreement.
8
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
On the terms and subject to the conditions set forth in the Amended Merger Agreement, at the effective time of the Merger (the “Effective Time”), (a) each share of our Class A common stock and our Class C Common Stock, par value $ i 0.01 per share, outstanding immediately prior to the Effective Time, will be converted into the right to receive a number of validly issued, fully paid and non-assessable shares of EchoStar Class A Common Stock, par value $ i 0.001 per share (“EchoStar Class A Common Stock”), equal to i 0.350877 (the “Exchange Ratio”) and (b) each share of our Class B common stock, par value $ i 0.01 per share, outstanding immediately prior to the Effective Time will be converted into the right to receive a number of validly issued, fully paid and non-assessable shares of EchoStar Class B Common Stock, par value $ i 0.001 per share (the “EchoStar Class B Common Stock” and, together with the EchoStar Class A Common Stock, the “EchoStar Common Stock”), equal to the Exchange Ratio, in each case except for any shares of our Class A common stock, Class B common stock and Class C common stock (collectively, “DISH Common Stock”) that are held in DISH Network’s treasury or held directly by EchoStar or Merger Sub immediately prior to the Effective Time. If the Merger is completed, the shares of the our Class A common stock will be delisted from the Nasdaq Global Select Market (“NASDAQ”) and deregistered under the Securities Exchange Act of 1934, as amended.
The respective obligations of DISH Network and EchoStar to consummate the transactions contemplated by the Amended Merger Agreement are subject to the satisfaction or waiver of a number of conditions, including, among others, (a) the adoption and approval of the Amended Merger Agreement and approval of the Merger by the affirmative vote of the holders of a majority of DISH Common Stock entitled to vote thereon, which condition was satisfied through the execution and delivery of a written consent (the “Ergen DISH Written Consent”) by the Ergen DISH Stockholders (as defined in the Amended Merger Agreement); and (b) the affirmative vote of a majority of the votes cast by the holders of EchoStar Common Stock entitled to vote thereon with respect to the issuance of shares of EchoStar Common Stock in connection with the Merger, which condition was satisfied through the execution and delivery of a written consent (the “Ergen EchoStar Written Consent”) by the Ergen EchoStar Stockholders (as defined in the Amended Merger Agreement).
Concurrently with the entry into the Amended Merger Agreement, the Ergen EchoStar Stockholders, the Ergen DISH Stockholders (collectively, the “Ergen Stockholders”), DISH Network and EchoStar entered into an amended and restated support agreement (the “Amended Support Agreement”), pursuant to which the Ergen Stockholders agreed, among other things: (a) not to transfer shares of DISH Common Stock or EchoStar Common Stock prior to the earlier of the Effective Time and the termination of the Amended Merger Agreement in accordance with the terms thereof, subject to certain limited exceptions and (b) to not vote, or cause or direct to be voted, the shares of EchoStar Class A Common Stock owned by them as of the closing of the Merger, other than with respect of any matter on presented to the holders of EchoStar Class A Common Stock on which holders of EchoStar Class B Common Stock are not entitled to vote, for three years following the closing of the Merger.
For more information and a copy of the Amended Merger Agreement and the Amended Support Agreement, see the Form 8-K of DISH Network Corporation filed on October 3, 2023.
9
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Other Developments
Cyber-Security Incident
On February 23, 2023, we announced on our quarterly earnings call that we had experienced a network outage that affected internal servers and IT telephony. We immediately activated our incident response and business continuity plans designed to contain, assess and remediate the situation. We engaged the services of cyber-security experts and outside advisors to assist in the evaluation of the situation, and once we determined that the outage was due to a cyber-security incident, we promptly notified appropriate law enforcement authorities.
On February 28, 2023, we further disclosed that certain data had been extracted from our IT systems as part of this incident. Our investigation into the extent of the incident is now completed. We have determined that our customer databases were not accessed in this incident. However, we have confirmed that certain employee-related records as well as a limited number of other records containing personal information were among the data extracted. We have taken steps to protect the affected records and personal information, and we received confirmation that the extracted data has been deleted. While we have no evidence that this data has been misused, we have notified individuals whose data was extracted.
Our DISH TV, SLING TV and Retail Wireless services, along with our wireless and data networks remained operational at all times during the incident. As of March 31, 2023, all significant systems had been restored.
During the first quarter of 2023, we incurred substantially all of our cyber-security-related expenses for this matter, including, but not limited to, costs to remediate the incident and provide additional customer support. During the second and third quarters of 2023, we did not incur additional material expenses resulting from the cyber-security incident and do not expect to incur material expenses in future periods. During the nine months ended September 30, 2023, we incurred approximately $ i 30 million in cyber-security-related expenses, which are recorded in “Cost of services” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
i2.Summary of Significant Accounting Policies
iBasis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, these statements do not include all of the information and notes required for complete financial statements prepared under GAAP. In our opinion, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Our results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2022. Certain prior period amounts have been reclassified to conform to the current period presentation.
/10
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
iPrinciples of Consolidation
We consolidate all majority owned subsidiaries, investments in entities in which we have controlling influence and VIEs where we have been determined to be the primary beneficiary. Minority interests are recorded as noncontrolling interests or redeemable noncontrolling interests. See below for further information. Non-consolidated investments are accounted for using the equity method when we have the ability to significantly influence the operating decisions of the investee. When we do not have the ability to significantly influence the operating decisions of an investee, these equity securities are classified as either marketable investment securities or other investments and recorded at fair value with changes recognized in “Other, net” within “Other Income (Expense)” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). All significant intercompany accounts and transactions have been eliminated in consolidation.
iRedeemable Noncontrolling Interests
Northstar Wireless. Northstar Wireless is a wholly-owned subsidiary of Northstar Spectrum, which is an entity owned by Northstar Manager, LLC (“Northstar Manager”) and us. Under the applicable accounting guidance in ASC 810, Northstar Spectrum is considered a VIE and, based on the characteristics of the structure of this entity and in accordance with the applicable accounting guidance, we consolidate Northstar Spectrum into our financial statements. The Northstar Operative Agreements, as amended, provide for, among other things, that Northstar Manager has the ability, but not the obligation, to require Northstar Spectrum to purchase Northstar Manager’s ownership interests in Northstar Spectrum (the “Northstar Put Right”) for a purchase price that equals its equity contribution to Northstar Spectrum plus a fixed annual rate of return.
The First Northstar Put Window closed in the first quarter of 2021. On October 21, 2022, we, through our wholly-owned subsidiary American II received notice that Northstar Manager exercised the Northstar Put Right effective as of October 21, 2022. The consummation of the sale was subject to consent by the FCC, which occurred on October 10, 2023. The value of the Northstar Put Right had accrued to approximately
$ i 109 million as of September 30, 2023. Subsequently, on October 12, 2023, we completed the purchase of Northstar Manager’s ownership interests in Northstar Spectrum, for approximately $ i 109 million. This purchase resulted in the elimination of all of our redeemable noncontrolling interest as it related to Northstar Spectrum as of the purchase date and we continue to consolidate the Northstar Entities as wholly-owned subsidiaries.
Northstar Purchase Agreement. On December 30, 2020, through our wholly-owned subsidiary American II, we entered into a Purchase Agreement (the “Northstar Purchase Agreement”) with Northstar Manager and Northstar Spectrum, pursuant to which American II purchased i 80% of Northstar Manager’s Class B Common Interests in Northstar Spectrum (the “Northstar Transaction”) for a purchase price of approximately $ i 312 million.
As a result of the Northstar Transaction, through American II, we hold i 97% of the Class B Common Interests in Northstar Spectrum and Northstar Manager holds i 3% of the Class B Common Interests in Northstar Spectrum. Other than the change in ownership percentage of Northstar Spectrum, the Northstar Transaction did not modify or amend in any way the existing arrangements between or among the Northstar parties.
/11
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Northstar Spectrum does not have a call right with respect to Northstar Manager’s ownership interests in Northstar Spectrum. Although Northstar Manager is the sole manager of Northstar Spectrum, Northstar Manager’s ownership interest is considered temporary equity under the applicable accounting guidance and is thus recorded as part of “Redeemable noncontrolling interests” in the mezzanine section of our Condensed Consolidated Balance Sheets. Northstar Manager’s ownership interest in Northstar Spectrum was initially accounted for at fair value. Subsequently, Northstar Manager’s ownership interest in Northstar Spectrum is increased by the fixed annual rate of return through “Redeemable noncontrolling interests” on our Condensed Consolidated Balance Sheets, with the offset recorded in “Net income (loss) attributable to noncontrolling interests, net of tax” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The operating results of Northstar Spectrum attributable to Northstar Manager are recorded as “Redeemable noncontrolling interests” on our Condensed Consolidated Balance Sheets, with the offset recorded in “Net income (loss) attributable to noncontrolling interests, net of tax” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). See Note 10 for further information.
SNR Wireless. SNR Wireless is a wholly-owned subsidiary of SNR HoldCo, which is an entity owned by SNR Wireless Management, LLC (“SNR Management”) and us. Under the applicable accounting guidance in ASC 810, SNR HoldCo is considered a VIE and, based on the characteristics of the structure of this entity and in accordance with the applicable accounting guidance, we consolidate SNR HoldCo into our financial statements. The SNR Operative Agreements, as amended, provide for, among other things, that SNR Management has the ability, but not the obligation, to require SNR HoldCo to purchase SNR Management’s ownership interests in SNR HoldCo (the “SNR Put Right”) for a purchase price that equals its equity contribution to SNR HoldCo plus a fixed annual rate of return.
The First SNR Put Window closed in the first quarter of 2021. On November 15, 2021, we, through our wholly-owned subsidiary American III received notice that SNR Management exercised the SNR Put Right effective as of November 15, 2021. The consummation of the sale is subject to consent by the FCC. The value of the SNR Put Right has accrued to approximately $ i 420 million as of September 30, 2023. If consented to by the FCC, the sale will result in the elimination of all of our redeemable noncontrolling interest as it related to SNR Wireless.
SNR HoldCo does not have a call right with respect to SNR Management’s ownership interests in SNR HoldCo. Although SNR Management is the sole manager of SNR HoldCo, SNR Management’s ownership interest is considered temporary equity under the applicable accounting guidance and is thus recorded as part of “Redeemable noncontrolling interests” in the mezzanine section of our Condensed Consolidated Balance Sheets. SNR Management’s ownership interest in SNR HoldCo was initially accounted for at fair value. Subsequently, SNR Management’s ownership interest in SNR HoldCo is increased by the fixed annual rate of return through “Redeemable noncontrolling interests” on our Condensed Consolidated Balance Sheets, with the offset recorded in “Net income (loss) attributable to noncontrolling interests, net of tax” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The operating results of SNR HoldCo attributable to SNR Management are recorded as “Redeemable noncontrolling interests” on our Condensed Consolidated Balance Sheets, with the offset recorded in “Net income (loss) attributable to noncontrolling interests, net of tax” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). See Note 10 for further information.
As of September 30, 2023 and December 31, 2022, the aggregate value of Northstar Manager’s ownership interest in Northstar Spectrum and SNR Management’s ownership interest in SNR HoldCo was $ i 529 million and $ i 464 million, respectively, recorded as “Redeemable noncontrolling interests” on our Condensed Consolidated Balance Sheets. Subsequently, the FCC consented to the sale of Northstar Manager’s ownership interests in Northstar Spectrum, which we purchased for a total of approximately $ i 109 million on October 12, 2023. This purchase resulted in the elimination of all of our redeemable noncontrolling interest as it related to Northstar Spectrum as of the purchase date and we continue to consolidate the Northstar Entities as wholly-owned subsidiaries.
12
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
iUse of Estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense for each reporting period. Estimates are based on historical experience and other reasonable assumptions in accounting for, among other things, allowances for credit losses (including those related to our installment billing programs), self-insurance obligations, deferred taxes and related valuation allowances, uncertain tax positions, loss contingencies, fair value of financial instruments, fair value of options granted under our stock-based compensation plans, fair value of assets and liabilities acquired in business combinations, the fair value of our option to purchase T-Mobile’s 800 MHz spectrum, relative standalone selling prices of performance obligations, finance leases, asset impairments, estimates of future cash flows used to evaluate and recognize impairments, useful lives of property, equipment and intangible assets, incremental borrowing rate (“IBR”) on lease right of use assets, nonrefundable upfront fees, independent third-party retailer incentives, programming expenses and subscriber lives. Economic conditions may increase the inherent uncertainty in the estimates and assumptions indicated above. Actual results may differ from previously estimated amounts, and such differences may be material to our condensed consolidated financial statements. Estimates and assumptions are reviewed periodically, and the effects of revisions are reflected prospectively in the period they occur.
iCapitalized Interest
We capitalize interest associated with the acquisition or construction of certain assets, including, among other things, our Wireless spectrum licenses, build-out costs associated with our 5G Network Deployment and satellites. Capitalization of interest begins when, among other things, steps are taken to prepare the asset for its intended use and ceases when the asset is ready for its intended use or when these activities are substantially suspended.
We are currently preparing for the commercialization of our 5G Network Deployment. As a result, the interest expense related to the carrying amount of the 5G Network Deployment qualifying assets is being capitalized. The qualifying assets currently exceed the carrying value of our long-term debt and finance lease obligations, therefore substantially all of our interest expense is being capitalized. However, as the qualifying assets, including certain bands of wireless spectrum licenses, are placed into service, we will no longer capitalize interest on those assets and we will begin to expense interest on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
iFair Value Measurements
We determine fair value based on the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. Market or observable inputs are the preferred source of values, followed by unobservable inputs or assumptions based on hypothetical transactions in the absence of market inputs. We apply the following hierarchy in determining fair value:
| ● | Level 1, defined as observable inputs being quoted prices in active markets for identical assets; |
| ● | Level 2, defined as observable inputs other than quoted prices included in Level 1, including quoted prices for similar assets and liabilities in active markets; and quoted prices for identical or similar instruments in markets that are not active; and |
| ● | Level 3, defined as unobservable inputs for which little or no market data exists, consistent with reasonably available assumptions made by other participants therefore requiring assumptions based on the best information available. |
13
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
As of September 30, 2023 and December 31, 2022, the carrying amount for cash and cash equivalents, trade accounts receivable (net of allowance for credit losses) and current liabilities (excluding the “Current portion of long-term debt and finance lease obligations”) was equal to or approximated fair value due to their short-term nature or proximity to current market rates. See Note 5 for the fair value of our marketable investment securities and derivative instruments.
Fair values for our publicly traded debt securities are based on quoted market prices, when available. The fair values of private debt are based on, among other things, available trade information, and/or an analysis in which we evaluate market conditions, related securities, various public and private offerings, and other publicly available information. In performing this analysis, we make various assumptions regarding, among other things, credit spreads, and the impact of these factors on the value of the debt securities. See Note 9 for the fair value of our long-term debt.
iAssets Recognized Related to the Costs to Obtain a Contract with a Subscriber
We recognize an asset for the incremental costs of obtaining a contract with a subscriber if we expect the benefit of those costs to be longer than one year. We have determined that certain sales incentive programs in both our Pay-TV and Wireless segments, including those with our independent third-party retailers, meet the requirements to be capitalized, and payments made under these programs are capitalized and amortized to expense over the estimated subscriber life exceeding one year. During the three months ended September 30, 2023
and 2022, we capitalized $ i 68 million and $ i 92 million, respectively, under these programs. The amortization expense related to these programs was $ i 92 million and $ i 103 million for the three months ended September 30, 2023 and 2022, respectively. During the nine months ended September 30, 2023 and 2022, we capitalized $ i 234 million and $ i 260 million, respectively, under these programs. The amortization expense related to these programs was $ i 286 million and $ i 323 million for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023 and December 31, 2022, we had a total of $ i 330 million and $ i 381 million, respectively, capitalized, net of amortization, on our Condensed Consolidated Balance Sheets. These amounts are capitalized in “Other current assets” and “Other noncurrent assets, net” on our Condensed Consolidated Balance Sheets, and then amortized in “Selling, general and administrative expenses” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). /
iAdvertising Costs
We recognize advertising expense when incurred as a component of “Selling, general and administrative expenses” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Advertising expenses totaled $ i 169 million and $ i 176 million for the three months ended September 30, 2023 and 2022, respectively. Advertising expenses totaled $ i 462 million and $ i 454 million for the nine months ended September 30, 2023 and 2022, respectively.
/
iResearch and Development
Research and development costs are expensed as incurred and are included as a component of “Selling, general and administrative expenses” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). Research and development costs totaled $ i 11 million and $ i 12 million for the three months ended September 30, 2023
and 2022, respectively. Research and development costs totaled $ i 33 million and $ i 34 million for the nine months ended September 30, 2023 and 2022, respectively. /
iNew Accounting Pronouncements
We do not expect that any recently issued accounting pronouncements will have a material effect on our condensed consolidated financial statements.
14
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
i3.Basic and Diluted Net Income (Loss) Per Share
We present both basic earnings per share (“EPS”) and diluted EPS. Basic EPS excludes potential dilution and is computed by dividing “Net income (loss) attributable to DISH Network” by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if stock awards were exercised and if our Convertible Notes were converted. The potential dilution from stock awards is accounted for using the treasury stock method based on the average market value of our Class A common stock for the reporting period. The potential dilution from conversion of the Convertible Notes is accounted for using the if-converted method, which requires that all of the shares of our Class A common stock issuable upon conversion of the Convertible Notes will be included in the calculation of diluted EPS assuming conversion of the Convertible Notes at the beginning of the reporting period (or at time of issuance, if later).
Merger Consideration
On the terms and subject to the conditions set forth in the Amended Merger Agreement, at the Effective Time, each share of our Class A Common Stock outstanding immediately prior to the Effective Time will be converted into EchoStar Class A Common Stock equal to the Exchange Ratio. See Note 1 for further information. In addition, on the terms and subject to the conditions set forth in the Amended Merger Agreement, prior to or at the Effective Time, we and EchoStar will cooperate and take all actions required to amend the terms and conditions of the Convertible Notes, the convertible note hedge transactions, and the warrant transactions. See Note 9 for further information.
The following table presents EPS amounts for all periods and the basic and diluted weighted-average shares outstanding used in the calculation.
i
| | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | | ||||||||
| | September 30, | | | |||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| ||||
| | (In thousands, except per share amounts) | | ||||||||||
Net income (loss) |
| $ | ( i 116,839) |
| $ | i 429,585 |
| $ | i 348,823 |
| $ | i 1,418,438 | |
Less: Net income (loss) attributable to noncontrolling interests, net of tax | |
| i 22,346 | |
| i 17,355 | |
| i 64,980 | |
| i 50,725 | |
Net income (loss) attributable to DISH Network - Basic |
| | ( i 139,185) |
| | i 412,230 |
| | i 283,843 |
| | i 1,367,713 | |
Interest on dilutive Convertible Notes, net of tax (1) | | | — | | | — | | | — | | | — | |
Net income (loss) attributable to DISH Network - Diluted | | $ | ( i 139,185) | | $ | i 412,230 | | $ | i 283,843 | | $ | i 1,367,713 | |
| | | | | | | | | | | | | |
Weighted-average common shares outstanding - Class A and B common stock: | | | | | | | | | | | | | |
Basic | |
| i 534,034 | |
| i 530,436 | |
| i 532,788 | |
| i 529,870 | |
Dilutive impact of Convertible Notes (2) | | | — | | | i 107,016 | | | i 107,016 | | | i 107,016 | |
Dilutive impact of stock awards outstanding (2) | |
| — | |
| i 3 | |
| i 127 | |
| i 409 | |
Diluted | |
| i 534,034 | |
| i 637,455 | |
| i 639,931 | |
| i 637,295 | |
| | | | | | | | | | | | | |
Earnings per share - Class A and B common stock: | | | | | | | | | | | | | |
Basic net income (loss) per share attributable to DISH Network |
| $ | ( i 0.26) |
| $ | i 0.78 |
| $ | i 0.53 |
| $ | i 2.58 | |
Diluted net income (loss) per share attributable to DISH Network |
| $ | ( i 0.26) |
| $ | i 0.65 |
| $ | i 0.44 |
| $ | i 2.15 | |
| | | | | | | | | | | | | |
| (1) | For both the three and nine months ended September 30, 2023 and 2022, substantially all of our interest expense was capitalized. See Note 2 for further information. |
| (2) | For the three months ended September 30, 2023, the dilutive impact of 107 million weighted-average shares of Class A common stock were excluded from the computation of “Diluted net income (loss) per share attributable to DISH Network” because the effect would have been anti-dilutive as a result of the net loss attributable to DISH Network in the period. |
/15
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Certain stock awards to acquire our Class A common stock are not included in the weighted-average common shares outstanding above, as their effect is anti-dilutive. In addition, vesting of performance/market based options and rights to acquire shares of our Class A common stock granted pursuant to our performance-based stock incentive plans (“Restricted Performance Units”) are both contingent upon meeting certain goals, some of which are not yet probable of being achieved.
Furthermore, the warrants that we issued to certain option counterparties in connection with the Convertible Notes due 2026 are only exercisable at their expiration if the market price per share of our Class A common stock is greater than the strike price of the warrants, which is approximately $ i 86.08 per share, subject to certain adjustments. As a consequence, the following are not included in the diluted EPS calculation.
i
| | | | | |
| | As of September 30, | | ||
|
| 2023 |
| 2022 |
|
| | (In thousands) | | ||
Anti-dilutive stock awards | | i 14,835 | | i 8,435 | |
Performance/market based options |
| i 13,565 | | i 15,508 | |
Restricted Performance Units/Awards | | — | | i 1,146 | |
Common stock warrants | | i 46,029 | | i 46,029 | |
Total | | i 74,429 | | i 71,118 | |
| | | | | |
/ i4.Supplemental Data - Statements of Cash Flows
The following table presents certain supplemental cash flow and other non-cash data. See Note 8 for supplemental cash flow and non-cash data related to leases.
i
| | | | | | | |
| | For the Nine Months Ended | | ||||
| | | |||||
|
| 2023 |
| 2022 | | ||
| | (In thousands) | | ||||
Cash paid for interest (including capitalized interest) |
| $ | i 851,275 | | $ | i 798,773 | |
Cash received for interest | | | i 11,578 | | | i 6,827 | |
Cash paid for income taxes | | | i 22,440 | | | i 49,746 | |
Capitalized interest (1) | | | i 969,736 | | | i 773,689 | |
Employee benefits paid in Class A common stock | | | i 14,680 | | | i 26,348 | |
Vendor financing | | | i 87,343 | | | i 82,325 | |
FCC licenses reclassification | | | — | | | i 122,657 | |
Accrued wireless equipment purchases | | | i 281,444 | | | i 537,977 | |
Asset retirement obligation | | | i 65,580 | | | i 101,342 | |
Accrued Upfront Payment (2) | | | i 100,000 | | | — | |
Unsettled sales of marketable investment securities | | | i 119,068 | | | — | |
| (1) | See Note 2 for further information. |
| (2) | See Note 5 for further information. |
16
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
i5. | Marketable Investment Securities, Restricted Cash and Cash Equivalents, and Other Investment Securities |
Our marketable investment securities, restricted cash and cash equivalents, and other investment securities consisted of the following:
i
| | | | | | |
| As of | | ||||
| September 30, | | | |||
| 2023 |
| 2022 |
| ||
| (In thousands) | | ||||
Marketable investment securities: | | | | | | |
Current marketable investment securities: | | | | | | |
Strategic - available-for-sale | $ | i 144 | | $ | i 144 | |
Strategic - trading/equity | | i 75 | | | i 655 | |
Other | | i 182,597 | | | i 835,184 | |
Total current marketable investment securities | | i 182,816 | | | i 835,983 | |
Restricted marketable investment securities (1) | | i 23,232 | | | i 41,689 | |
Total marketable investment securities | | i 206,048 | | | i 877,672 | |
| | | | | | |
Restricted cash and cash equivalents (1) | | i 84,119 | | | i 62,925 | |
| | | | | | |
Other investment securities: | | | | | | |
Other investment securities | | i 180,333 | | | i 168,200 | |
Total other investment securities | | i 180,333 | | | i 168,200 | |
| | | | | | |
Total marketable investment securities, restricted cash and cash equivalents, and other investment securities | $ | i 470,500 | | $ | i 1,108,797 | |
| | | | | | |
| (1) | Restricted marketable investment securities and restricted cash and cash equivalents are included in “Restricted cash, cash equivalents and marketable investment securities” on our Condensed Consolidated Balance Sheets. |
Marketable Investment Securities
Our marketable investment securities portfolio consists of and may consist of debt and equity instruments. All equity securities are carried at fair value, with changes in fair value recognized in “Other, net” within “Other Income (Expense)” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). All debt securities are classified as available-for-sale and are recorded at fair value. We report the temporary unrealized gains and losses related to changes in market conditions of marketable debt securities as a separate component of “Accumulated other comprehensive income (loss)” within “Stockholders’ Equity (Deficit),” net of related deferred income tax on our Condensed Consolidated Balance Sheets. The corresponding changes in the fair value of marketable debt securities, which are determined to be company specific credit losses are recorded in “Other, net” within “Other Income (Expense)” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
Current Marketable Investment Securities – Strategic
Our current strategic marketable investment securities portfolio includes and may include strategic and financial debt and/or equity investments in private and public companies that are highly speculative and have experienced and continue to experience volatility. As of September 30, 2023, this portfolio consisted of securities of a small number of issuers, and as a result the value of that portfolio depends, among other things, on the performance of those issuers. The fair value of certain of the debt and equity securities in this portfolio can be adversely impacted by, among other things, the issuers’ respective performance and ability to obtain any necessary additional financing on acceptable terms, or at all.
/17
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Current Marketable Investment Securities - Other
Our current other marketable investment securities portfolio includes investments in various debt instruments including, among others, commercial paper, corporate securities and United States treasury and/or agency securities.
Commercial paper consists mainly of unsecured short-term, promissory notes issued primarily by corporations with maturities ranging up to i 365 days. Corporate securities consist of debt instruments issued by corporations with various maturities normally less than i 18 months. U.S. Treasury and agency securities consist of debt instruments issued by the federal government and other government agencies.
Restricted Cash, Cash Equivalents and Marketable Investment Securities
As of September 30, 2023 and December 31, 2022, our restricted marketable investment securities, together with our restricted cash and cash equivalents, included amounts required as collateral for our letters of credit and trusts.
Other Investment Securities
We have strategic investments in certain debt and/or equity securities that are included in noncurrent “Other investment securities” on our Condensed Consolidated Balance Sheets. Our debt securities are classified as available-for-sale and are recorded at fair value, and our equity securities are accounted for using the equity method of accounting or recorded at fair value. Certain of our equity method investments are detailed below.
NagraStar L.L.C. We own a i 50% interest in NagraStar L.L.C. (“NagraStar”), a joint venture that is our primary provider of encryption and related security systems intended to assure that only authorized customers have access to our programming.
Invidi Technologies Corporation. In November 2016, we, AT&T Inc., and Cavendish Square Holding B.V., an affiliate of WPP plc, entered into a series of agreements to acquire Invidi Technologies Corporation (“Invidi”), an entity that provides proprietary software for the addressable advertising market.
TerreStar Solutions, Inc. In March 2019, we closed a transaction with TerreStar Solutions, Inc. (“TSI”) to acquire additional equity securities of TSI, an entity that holds certain 2 GHz wireless spectrum licenses in Canada, in exchange for certain Canadian assets, including, among other things, a portion of the satellite capacity on our T1 satellite, which we had acquired from TerreStar Networks, Inc. in 2012.
Our ability to realize value from our strategic investments in securities that are not publicly traded depends on, among other things, the success of the issuers’ businesses and their ability to obtain sufficient capital, on acceptable terms or at all, and to execute their business plans. Because private markets are not as liquid as public markets, there is also increased risk that we will not be able to sell these investments, or that when we desire to sell them we will not be able to obtain fair value for them.
18
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Fair Value Measurements
Our investments measured at fair value on a recurring basis were as follows:
i
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of | | ||||||||||||||||||||||
| | | | ||||||||||||||||||||||
|
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| Level 1 |
| Level 2 |
| Level 3 |
| ||||||||
| | (In thousands) | | ||||||||||||||||||||||
Cash equivalents (including restricted) | | $ | i 745,774 | | $ | i 54,839 | | $ | i 690,935 | | $ | — | | $ | i 1,620,458 | | $ | i 174,050 | | $ | i 1,446,408 | | $ | — |
|
| | | | | | | | | | | | | | | | | | | | | | | | | |
Debt securities (including restricted): | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury and agency securities | | $ | i 5,076 | | $ | i 5,076 | | $ | — | | $ | — | | $ | i 22,824 | | $ | i 22,824 | | $ | — | | $ | — | |
Commercial paper | | | i 180,086 | | | — | | | i 180,086 | | | — | | | i 696,324 | | | — | | | i 696,324 | | | — | |
Corporate securities | | | i 17,901 | | | — | | | i 17,901 | | | — | | | i 156,380 | | | — | | | i 156,380 | | | — | |
Other | | | i 2,910 | | | — | | | i 2,766 | | | i 144 | | | i 1,489 | | | — | | | i 1,345 | | | i 144 | |
Equity securities | | | i 75 | | | i 75 | | | — | | | — | | | i 655 | | | i 655 | | | — | | | — | |
Total | | $ | i 206,048 | | $ | i 5,151 | | $ | i 200,753 | | $ | i 144 | | $ | i 877,672 | | $ | i 23,479 | | $ | i 854,049 | | $ | i 144 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
As of September 30, 2023, restricted and non-restricted marketable investment securities included debt securities of $ i 206 million with contractual maturities within one year. Actual maturities may differ from contractual maturities as a result of our ability to sell these securities prior to maturity.
Derivative Instruments
We have the option to purchase certain of T-Mobile’s 800 MHz spectrum licenses from T-Mobile at a fixed price. This instrument meets the definition of a derivative and is valued based upon, among other things, our estimate of the underlying asset price, the expected term, volatility, the risk free rate of return and the probability of us exercising the option. The instrument acquisition date fair value was $ i 713 million. The derivative is remeasured quarterly. As of September 30, 2023 and December 31, 2022, the derivative’s fair value was $ i 1.501 billion and $ i 1.693 billion, respectively, and is included in “Other noncurrent assets, net” on our Condensed Consolidated Balance Sheets. The change in the derivative’s carrying value was primarily driven by a decrease in our estimated probability of exercising the option. This decrease was partially offset by an increase in the estimated underlying asset value based on Level 3 current market data indicative pricing for similar assets. All changes in the derivative’s fair value are recorded in “Other, net” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) until the option is either exercised or expires. See the table below. If we elect to exercise the option and purchase these licenses, we will record the licenses at fair value at that date in “FCC authorizations” on our Condensed Consolidated Balance Sheets. If we elect to not exercise the option or it expires, we will expense the derivative’s fair value at that date on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) and were potentially subject to pay T-Mobile a fee of approximately $ i 72 million per the License Purchase Agreement under certain circumstances. In conjunction with the Amendment that modifies the License Purchase Agreement, discussed below, the $ i 72 million fee has been superseded by the Upfront Payment, defined below. See Note 10 further information on the License Purchase Agreement.
On June 30, 2023, the United States Department of Justice, Antitrust Division (the “DOJ”) provided notice to the United States District Court for the District of Columbia (the “District Court”) that, pursuant to its discretion under the Final Judgment, it granted a i 60-day extension of the deadline for T-Mobile to divest the 800 MHz spectrum licenses, which expired on August 30, 2023.
19
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
On August 17, 2023, we filed a petition with the District Court seeking an extension of the deadline for T-Mobile to divest the 800 MHz spectrum licenses.
On October 15, 2023, we and T-Mobile entered into an amendment to the License Purchase Agreement (the “Amendment”) that, among other things, extends the date by which we may purchase the 800 MHz spectrum licenses to April 1, 2024 (the “Extension”). In connection with the Extension, we agreed to make an upfront payment of $ i 100 million (the “Upfront Payment”) to T-Mobile. The Amendment also resolves all outstanding disputes between the parties with respect to the License Purchase Agreement.
The Amendment has been approved by the DOJ in accordance with the Stipulation and Order filed in the District Court on July 26, 2019 and the Final Judgment entered by the District Court on April 1, 2020. The Amendment became effective upon the District Court entering the Amended Final Judgment on October 23, 2023.
The Upfront Payment is fully creditable against the purchase price in the event we exercise our option to purchase the 800 MHz spectrum licenses from T-Mobile. T-Mobile has the right (but not the obligation) to pursue an alternative offer between now and April 1, 2024 provided that we retain the first right to purchase the spectrum before April 1, 2024. If we elect to not exercise the option to purchase the 800 MHz spectrum licenses pursuant to the License Purchase Agreement or it expires, T-Mobile will retain the $ i 100 million Upfront Payment per the Amendment and we will expense the Upfront Payment at that date on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
As of September 30, 2023, we recorded the $ i 100 million Upfront Payment in “Other noncurrent assets, net” with the offsetting liability in “Other accrued expenses” on our Condensed Consolidated Balance Sheets. Subsequently, on October 25, 2023, we paid the $ i 100 million Upfront Payment to T-Mobile.
We account for our option to purchase certain T-Mobile’s 800 MHz spectrum licenses under the License Purchase Agreement as a Level 3 instrument within the fair value hierarchy.
20
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Gains and Losses on Sales and Changes in Carrying Amounts of Investments and Other
“Other, net” within “Other Income (Expense)” included on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) is as follows:
i | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
Other, net: |
| 2023 |
| 2022 |
| 2023 |
| 2022 |
| ||||
| | (In thousands) | | ||||||||||
Marketable and non-marketable investment securities - realized and unrealized gains (losses) | | $ | i 20 | | $ | i 26,569 | | $ | i 1,432 | | $ | i 26,531 | |
Derivative instruments - net realized and/or unrealized gains (losses) (1) | | | ( i 155,133) | | | i 34,000 | | | ( i 192,107) | | | i 92,000 | |
Gains (losses) related to early redemption of debt (2) | | | i 4,480 | | | — | | | i 72,566 | | | ( i 1,149) | |
Equity in earnings (losses) of affiliates | | | ( i 1,216) | | | ( i 570) | | | ( i 3,596) | | | i 687 | |
Other | | | i 352 | | | ( i 2,058) | | | i 979 | | | ( i 3,805) | |
Total | | $ | ( i 151,497) | | $ | i 57,941 | | $ | ( i 120,726) | | $ | i 114,264 | |
| | | | | | | | | | | | | |
| (1) | The change in the derivative’s carrying value was primarily driven by a decrease in our estimated probability of exercising the option to purchase certain of T-Mobile’s 800 MHz spectrum licenses. This decrease was partially offset by an increase in the estimated underlying asset value based on Level 3 current market data indicative pricing for similar assets. |
| (2) | This change primarily resulted from repurchases of our Convertible Notes and 5 7/8% Senior Notes due 2024 during the three and nine months ended September 30, 2023. See Note 9 for further information. |
i6.Inventory
Inventory consisted of the following:
i | | | | | | | |
| | As of | | ||||
| | September 30, | | | |||
|
| 2023 |
| 2022 |
| ||
| | (In thousands) | | ||||
Finished goods | | $ | i 484,270 | | $ | i 447,322 | |
Work-in-process and service repairs | | | i 34,060 | | | i 19,351 | |
Consignment (1) | | | i 54,261 | | | i 14,792 | |
Raw materials | | | — | | | i 20,908 | |
Total inventory | | $ | i 572,591 | | $ | i 502,373 | |
| | | | | | | |
| (1) | This change primarily resulted from a distribution agreement related to Boost Infinite wireless devices. |
i
21
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
7.Property and Equipment and Intangible Assets
Property and Equipment
Property and equipment consisted of the following:
i
| | | | | | | | | | | |
| | | | | | | | | | | |
| | Depreciable | | As of | | ||||||
| | Life | | September 30, | | December 31, | | ||||
|
| (In Years) |
| 2023 |
| 2022 |
| ||||
| | | | | | (In thousands) | | ||||
Equipment leased to customers | | i 2 | - | i 5 | | $ | i 1,229,396 | | $ | i 1,318,272 | |
Satellites | | i 4 | - | i 15 | | | i 1,718,865 | | | i 1,718,865 | |
Satellites acquired under finance lease agreements | | | i 15 | | | | i 344,447 | | | i 344,447 | |
Furniture, fixtures, equipment and other | | i 2 | - | i 20 | | | i 1,220,570 | | | i 1,215,496 | |
5G Network Deployment equipment (1) | | i 3 | - | i 15 | | | i 2,854,590 | | | i 770,153 | |
Software | | i 3 | - | i 6 | | | i 1,655,104 | | | i 1,354,656 | |
Buildings and improvements | | i 5 | - | i 40 | | | i 381,768 | | | i 380,519 | |
Land | | | - | | | | i 17,513 | | | i 17,513 | |
Construction in progress | | | - | | | | i 2,921,462 | | | i 3,170,623 | |
Total property and equipment | | | | | | | i 12,343,715 | | | i 10,290,544 | |
Accumulated depreciation | | | | | | | ( i 5,118,839) | | | ( i 4,650,425) | |
Property and equipment, net | | | | | | $ | i 7,224,876 | | $ | i 5,640,119 | |
| | | | | | | | | | | |
| (1) | Includes 5G Network Deployment assets acquired under finance lease agreements. |
Depreciation and amortization expense consisted of the following:
i
| | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | | ||||||||
| | September 30, | | | |||||||||
|
| 2023 |
| 2022 | | 2023 |
| 2022 |
| ||||
| | (In thousands) | | ||||||||||
Equipment leased to customers | | $ | i 34,466 | | $ | i 47,745 | | $ | i 126,073 | | $ | i 148,775 | |
Satellites | | | i 32,956 | | | i 36,083 | | | i 101,993 | | | i 111,970 | |
Buildings, furniture, fixtures, equipment and other | | | i 24,780 | | | i 10,552 | | | i 52,099 | | | i 34,927 | |
5G Network Deployment equipment | | | i 94,204 | | | i 6,665 | | | i 231,085 | | | i 14,989 | |
Software | | | i 63,484 | | | i 35,979 | | | i 159,460 | | | i 98,728 | |
Intangible assets | | | i 44,907 | | | i 37,712 | | | i 135,794 | | | i 109,911 | |
Total depreciation and amortization | | $ | i 294,797 | | $ | i 174,736 | | $ | i 806,504 | | $ | i 519,300 | |
| | | | | | | | | | | | | |
Cost of sales and operating expense categories included in our accompanying Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) do not include depreciation and amortization expense related to satellites, equipment leased to customers, or our 5G Network Deployment equipment and software.
22
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Satellites
Pay-TV Satellites. We currently utilize i nine satellites in geostationary orbit approximately 22,300 miles above the equator, i seven of which we own and depreciate over their estimated useful life. We also lease i two satellites from third parties: Anik F3, which is accounted for as an operating lease, and Nimiq 5, which is accounted for as a finance lease and is depreciated over its economic life. As of July 2023, we no longer lease the Ciel II satellite.
As of September 30, 2023, our pay-TV satellite fleet consisted of the following:
i
| | | | | | | |
| | | | Degree | | Lease | |
| | Launch | | Orbital | | Termination | |
Satellites |
| Date |
| Location |
| Date | |
Owned: | | | | | | | |
EchoStar X | | February 2006 | | 110 | | N/A | |
EchoStar XI | | July 2008 | | 110 | | N/A | |
EchoStar XIV | | March 2010 | | 119 | | N/A | |
EchoStar XV | | July 2010 | | 61.5 | | N/A | |
EchoStar XVI | | November 2012 | | 61.5 | | N/A | |
EchoStar XVIII | | June 2016 | | 61.5 | | N/A | |
EchoStar XXIII | | March 2017 | | 110 | | N/A | |
| | | | | | | |
Under Construction: | | | | | | | |
EchoStar XXV | | 2026 | | 110 | | N/A | |
| | | | | | | |
Leased from Other Third-Party: | | | | | | | |
Anik F3 | | April 2007 | | 118.7 | | April 2025 | |
Nimiq 5 | | September 2009 | | 72.7 | | September 2024 | |
| | | | | | | |
Satellite Under Construction
EchoStar XXV. On March 20, 2023, we entered into a contract with Maxar Space LLC for the construction of EchoStar XXV, a DBS satellite that is capable of providing service to the continental United States (“CONUS”) and is intended to be used at the 110 degree orbital location. Subsequent to September 30, 2023, we entered into an agreement with Space Exploration Technologies Corp (“SpaceX”) for launch services for this satellite, which is expected to be launched during 2026.
i8.Leases
We enter into non-cancelable operating and finance leases for, among other things, communication towers, satellites, office space, dark fiber and transport equipment, warehouses and distribution centers, vehicles and other equipment. Substantially all of our leases have remaining lease terms from one to i i 15 years / , some of which include i renewal i options, and some of which include i i options to terminate / the leases within i i one year / . For certain arrangements (generally communication towers), the lease term includes the non-cancelable period plus the renewal period that we are reasonably certain to exercise.
Through the first quarter of 2022, our Anik F3 and Nimiq 5 satellites were accounted for as finance leases. However, during April 2022, we extended the Anik F3 lease and as a result it is currently accounted for as an operating lease. Substantially all of our remaining leases are accounted for as operating leases.
/23
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
The components of lease expense were as follows:
i
| | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | ||||||||
| | September 30, | | |||||||||
|
| 2023 | | 2022 | | 2023 | | 2022 | ||||
| | (In thousands) | ||||||||||
Operating lease cost (1) | | $ | i 130,288 | | $ | i 91,447 | | $ | i 364,622 | | $ | i 229,359 |
| | | | | | | | | | | | |
Short-term lease cost (2) | | | i 2,686 | | | i 3,281 | | | i 8,107 | | | i 10,220 |
| | | | | | | | | | | | |
Finance lease cost: | | | | | | | | | | | | |
Amortization of right-of-use assets | | | i 13,316 | | | i 6,048 | | | i 53,505 | | | i 21,989 |
Interest on lease liabilities | | | i 3,521 | | | i 3,926 | | | i 10,915 | | | i 9,084 |
Total finance lease cost | | | i 16,837 | | | i 9,974 | | | i 64,420 | | | i 31,073 |
Total lease costs | | $ | i 149,811 | | $ | i 104,702 | | $ | i 437,149 | | $ | i 270,652 |
| | | | | | | | | | | | |
| (1) | The increase in operating lease cost is primarily related to communication tower leases. |
| (2) | Leases that have terms of 12 months or less. |
/Supplemental cash flow information related to leases was as follows:
| | | | | | | |
| | For the Nine Months Ended | | ||||
| | | |||||
|
| 2023 | | 2022 | | ||
| | (In thousands) | | ||||
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | |
Operating cash flows from operating leases | | $ | i 233,135 | | $ | i 106,036 | |
Operating cash flows from finance leases | | $ | i 9,778 | | $ | i 8,721 | |
Financing cash flows from finance leases | | $ | i 37,936 | | $ | i 34,266 | |
| | | | | | | |
Right-of-use assets obtained in exchange for lease obligations: | | | | | | | |
Operating leases | | $ | i 559,539 | | $ | i 1,184,791 | |
Finance leases | | $ | i 53,771 | | $ | i 51,661 | |
/
24
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Supplemental balance sheet information related to leases was as follows:
i
| | | | | | | |
| | As of | | ||||
| | September 30, | | | |||
| | 2023 | | 2022 | | ||
| | (In thousands) | | ||||
Operating Leases: | | | | | | | |
Operating lease assets | | $ | i 3,052,636 | | $ | i 2,687,522 | |
| | | | | | | |
Other current liabilities | | $ | i 274,217 | | $ | i 194,030 | |
Operating lease liabilities | | | i 3,096,308 | | | i 2,687,883 | |
Total operating lease liabilities | | $ | i 3,370,525 | | $ | i 2,881,913 | |
| | | | | | | |
Finance Leases: | | | | | | | |
Property and equipment, gross | | $ | i 465,549 | | $ | i 411,778 | |
Accumulated depreciation | | | ( i 357,328) | | | ( i 303,802) | |
Property and equipment, net | | $ | i 108,221 | | $ | i 107,976 | |
| | | | | | | |
Other current liabilities | | $ | i 61,875 | | $ | i 48,066 | |
Other long-term liabilities | | | i 77,314 | | | i 75,287 | |
Total finance lease liabilities | | $ | i 139,189 | | $ | i 123,353 | |
| | | | | | | |
Weighted Average Remaining Lease Term: | | | | | | | |
Operating leases | | | i 11.1 years | | | i 11.8 years | |
Finance leases | | | i 2.4 years | | | i 2.7 years | |
| | | | | | | |
Weighted Average Discount Rate: | | | | | | | |
Operating leases | | | i 8.2% | | | i 7.3% | |
Finance leases | | | i 9.7% | | | i 9.8% | |
/Maturities of lease liabilities as of September 30, 2023 were as follows:
i i
| | | | | | | | | | |
| | Maturities of Lease Liabilities | | |||||||
| | Operating | | Finance | | | | | ||
For the Years Ending December 31, | | Leases | | Leases | | Total | | |||
| | (In thousands) | | |||||||
2023 (remaining three months) | | $ | i 91,796 | | $ | i 21,949 | | $ | i 113,745 | |
2024 | | | i 392,168 | | | i 63,331 | | | i 455,499 | |
2025 | | | i 430,568 | | | i 35,392 | | | i 465,960 | |
2026 | | | i 462,804 | | | i 36,588 | | | i 499,392 | |
2027 | | | i 465,517 | | | i 2,574 | | | i 468,091 | |
Thereafter | | | i 3,438,681 | | | — | | | i 3,438,681 | |
Total lease payments | | | i 5,281,534 | | | i 159,834 | | | i 5,441,368 | |
Less: Imputed interest | | | ( i 1,911,009) | | | ( i 20,645) | | | ( i 1,931,654) | |
Total | | | i 3,370,525 | | | i 139,189 | | | i 3,509,714 | |
Less: Current portion | | | ( i 274,217) | | | ( i 61,875) | | | ( i 336,092) | |
Long-term portion of lease obligations | | $ | i 3,096,308 | | $ | i 77,314 | | $ | i 3,173,622 | |
| | | | | | | | | | |
/ / i
25
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
9.Long-Term Debt and Finance Lease Obligations
Fair Value of our Long-Term Debt
The following table summarizes the carrying amount and fair value of our debt facilities as of September 30, 2023 and December 31, 2022:
i
| | | | | | | | | | | | | |
| | As of | | ||||||||||
| | | | ||||||||||
|
| Carrying |
| Fair Value |
| Carrying |
| Fair Value | | ||||
| | (In thousands) | | ||||||||||
i 5% Senior Notes due 2023 (1) | | $ | — | | $ | — | | $ | i 1,443,179 | | $ | i 1,441,635 | |
2 3/8% Convertible Notes due 2024 (2) | | | i 951,168 | | | i 916,688 | | | i 1,000,000 | | | i 906,970 | |
5 7/8% Senior Notes due 2024 (3) | | | i 1,989,139 | | | i 1,855,529 | | | i 2,000,000 | | | i 1,870,940 | |
i 0% Convertible Notes due 2025 (4) | | | i 1,957,197 | | | i 1,321,108 | | | i 2,000,000 | | | i 1,287,540 | |
7 3/4% Senior Notes due 2026 | | | i 2,000,000 | | | i 1,504,760 | | | i 2,000,000 | | | i 1,620,280 | |
3 3/8% Convertible Notes due 2026 (5) | | | i 2,908,801 | | | i 1,757,643 | | | i 3,000,000 | | | i 1,894,230 | |
5 1/4% Senior Secured Notes due 2026 | | | i 2,750,000 | | | i 2,338,683 | | | i 2,750,000 | | | i 2,336,813 | |
11 3/4% Senior Secured Notes due 2027 (6) | | | i 3,500,000 | | | i 3,522,750 | | | i 2,000,000 | | | i 2,071,240 | |
7 3/8% Senior Notes due 2028 | | | i 1,000,000 | | | i 634,930 | | | i 1,000,000 | | | i 708,320 | |
5 3/4% Senior Secured Notes due 2028 | | | i 2,500,000 | | | i 1,928,025 | | | i 2,500,000 | | | i 2,013,675 | |
5 1/8% Senior Notes due 2029 | | | i 1,500,000 | | | i 841,710 | | | i 1,500,000 | | | i 976,755 | |
Other notes payable | | | i 116,800 | | | i 116,800 | | | i 138,303 | | | i 138,303 | |
Subtotal | | | i 21,173,105 | | $ | i 16,738,626 | | | i 21,331,482 | | $ | i 17,266,700 | |
Unamortized deferred financing costs and other debt discounts, net | | | ( i 68,283) | | | | | | ( i 105,697) | | | | |
Finance lease obligations (7) | | | i 139,189 | | | | | | i 123,353 | | | | |
Total long-term debt and finance lease obligations (including current portion) | | $ | i 21,244,011 | | | | | $ | i 21,349,138 | | | | |
| | | | | | | | | | | | | |
| (1) | We had repurchased or redeemed the principal balance of our i 5% Senior Notes due 2023 as of March 15, 2023, the instrument’s maturity date. |
| (2) | During the three and nine months ended September 30, 2023, we repurchased approximately $ i 44 million and $ i 49 million, respectively, of our 2 3/8% Convertible Notes due 2024 in open market trades. The remaining balance of approximately $ i 951 million matures on March 15, 2024. Our 2 3/8% Convertible Notes due 2024 are included in “Current portion of long-term debt and finance lease obligations” on our Condensed Consolidated Balance Sheets as of September 30, 2023. |
| (3) | During both the three and nine months ended September 30, 2023, we repurchased approximately $ i i 11 / million of our 5 7/8% Senior Notes due 2024 in open market trades. The remaining balance of approximately $ i 1.989 billion matures on November 15, 2024. |
| (4) | During the three and nine months ended September 30, 2023, we repurchased approximately i zero and $ i 43 million, respectively, of our i 0% Convertible Notes due 2025 in open market trades. The remaining balance of approximately $ i 1.957 billion matures on December 15, 2025. |
| (5) | During the three and nine months ended September 30, 2023, we repurchased approximately i zero and $ i 91 million, respectively, of our 3 3/8% Convertible Notes due 2026 in open market trades. The remaining balance of approximately $ i 2.909 billion matures on August 15, 2026. |
| (6) | On January 26, 2023, we issued an additional $ i 1.5 billion aggregate principal amount of our 11 3/4% Senior Secured Notes due 2027. |
| (7) | Disclosure regarding fair value of finance leases is not required. |
We estimated the fair value of our publicly traded long-term debt using market prices in less active markets (Level 2).
26
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Future Capital Requirements
We have and expect to continue to incur significant expenditures in 2023 and 2024 related to our 5G Network Deployment, including, but not limited to, capital expenditures associated with our 5G Network Deployment, and the potential purchase of additional wireless spectrum licenses. The amount of capital required will also depend on, among other things, debt maturities (as detailed in the table above), the growth of our Retail Wireless business unit and the levels of investment necessary to support potential strategic initiatives that may arise from time to time. We do not currently have cash, marketable investment securities balances and/or projected future cash flows to fully fund our 2024 debt maturities. Since we reached our 5G Network Deployment milestone of i 70% of the U.S. population, we expect our capital expenditures will decline in the near term. However, as we prepare for our next build-out requirements in 2025, we expect our capital expenditures to increase as we approach this deadline.
To address any remaining capital needs in the near-term, including repayment of our March 2024 debt maturity, we plan to implement one or more of the following options, among other things: raise additional capital, complete the Merger, pursue strategic transactions and/or advance additional cost reduction initiatives. We believe it is probable the Merger will close prior to the March 2024 debt maturity, however, there can be no assurances. Our cost reduction initiatives may include, among other things, a decrease in the anticipated rate at which we acquire subscribers, a reduction to certain selling, general and administrative expenses, and a further reduction in our capital expenditures. Any additional capital may not be available at the historical interest rates of our long-term debt, as detailed in the table above, or at all, due to, among other things, the current market rate environment.
Convertible Notes
Merger Consideration
On the terms and subject to the conditions set forth in the Amended Merger Agreement, prior to or at the Effective Time, we and EchoStar will cooperate and take all actions required to amend the terms and conditions of the Convertible Notes and the convertible note hedge transactions to cause each of the Convertible Notes that are issued and outstanding immediately prior to the Effective Time to remain issued and outstanding but to represent a right, on substantially the same terms and conditions as applied to each of the corresponding Convertible Notes immediately prior to the Effective Time, to convert into shares of EchoStar Class A Common Stock, at a conversion rate equal to the product of (A) the conversion rate underlying each such right to convert into shares of our Class A common stock immediately prior to the Effective Time and (B) the Exchange Ratio. On the terms and subject to the conditions set forth in the Amended Merger Agreement, prior to or at the Effective Time, we and EchoStar will cooperate and take all actions required to amend the terms and conditions of the warrant transactions to cause each warrant that is issued and unexercised immediately prior to the Effective Time to remain issued and unexercised but to be converted into a right, on substantially the same terms and conditions as applied to the corresponding warrant immediately prior to the Effective Time, to acquire shares of EchoStar Class A Common Stock. The number of shares of EchoStar Class A Common Stock subject to each such warrant will be equal to the product of (A) the number of shares of our Class A common stock subject to the corresponding warrant immediately prior to the Effective Time and (B) the Exchange Ratio, and the per share exercise price for the shares of EchoStar Class A Common Stock issuable upon exercise of each such warrant will be determined by dividing (A) the per share exercise price for the shares of our Class A common stock otherwise purchasable pursuant to the corresponding warrant immediately prior to the Effective Time by (B) the Exchange Ratio, subject, in each case, to any adjustments to the terms of the warrants required or permitted pursuant to the terms of the warrant transactions.
27
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
2 3/8% Convertible Notes due 2024
On March 17, 2017, we issued $ i 1.0 billion aggregate principal amount of the Convertible Notes due March 15, 2024 in a private placement. Interest accrues at an annual rate of 2 3/8% and is payable semi-annually in cash, in arrears on March 15 and September 15 of each year.
The Convertible Notes due 2024 are:
| ● | our general unsecured obligations; |
| ● | ranked senior in right of payment to any future indebtedness that is expressly subordinated in right of payment to the Convertible Notes due 2024; |
| ● | ranked equally in right of payment with all of our existing and future unsecured senior indebtedness; |
| ● | ranked effectively junior to any of our existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness; |
| ● | ranked structurally junior to all indebtedness and other liabilities of our subsidiaries; and |
| ● | not guaranteed by our subsidiaries. |
We may not redeem the Convertible Notes due 2024 prior to the maturity date. If a “fundamental change” (as defined in the related indenture) occurs prior to the maturity date of the Convertible Notes due 2024, holders may require us to repurchase for cash all or part of their Convertible Notes due 2024 at a repurchase price equal to i 100% of the principal amount of such Convertible Notes due 2024, plus accrued and unpaid interest to, but not including, the fundamental change repurchase date.
The indenture related to the Convertible Notes due 2024 does not contain any financial covenants and does not restrict us from paying dividends, issuing or repurchasing our other securities, issuing new debt (including secured debt) or repaying or repurchasing our debt.
Subject to the terms of the related indenture, the Convertible Notes due 2024 may be converted at an initial conversion rate of i 12.1630 shares of our Class A common stock per $ i 1,000 principal amount of Convertible Notes due 2024 (equivalent to an initial conversion price of approximately $ i 82.22 per share of our Class A common stock) (the “Initial Conversion Rate”), at any time on or after October 15, 2023 through the second scheduled trading day preceding the maturity date. Holders of the Convertible Notes due 2024 will also have the right to convert the Convertible Notes due 2024 at the Initial Conversion Rate prior to October 15, 2023, but only upon the occurrence of specified events described in the related indenture. The conversion rate is subject to anti-dilution adjustments if certain events occur. Upon any conversion, we will settle our conversion obligation in cash, shares of our Class A common stock or a combination of cash and shares of our Class A common stock, at our election.
i 0% Convertible Notes due 2025
On December 21, 2020, we issued $ i 2.0 billion aggregate principal amount of the Convertible Notes due December 15, 2025 in a private placement. These notes will not bear interest, and the principal amount of the Notes will not accrete.
The Convertible Notes due 2025 are:
| ● | our general unsecured obligations; |
| ● | ranked senior in right of payment to any future indebtedness that is expressly subordinated in right of payment to the Convertible Notes due 2025; |
| ● | ranked equally in right of payment with all of our existing and future unsecured senior indebtedness; |
| ● | ranked effectively junior to any of our existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness; |
| ● | ranked structurally junior to all indebtedness and other liabilities of our subsidiaries; and |
| ● | not guaranteed by our subsidiaries. |
28
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
We may not redeem the Convertible Notes due 2025 prior to the maturity date. If a “fundamental change” (as defined in the related indenture) occurs prior to the maturity date of the Convertible Notes due 2025, holders may require us to repurchase for cash all or part of their Convertible Notes due 2025 at a repurchase price equal to i 100% of the principal amount of such Convertible Notes due 2025, plus accrued and unpaid interest to, but not including, the fundamental change repurchase date.
The indenture related to the Convertible Notes due 2025 does not contain any financial covenants and does not restrict us from paying dividends, issuing or repurchasing our other securities, issuing new debt (including secured debt) or repaying or repurchasing our debt.
Subject to the terms of the related indenture, the Convertible Notes due 2025 may be converted at an initial conversion rate of i 24.4123 shares of our Class A common stock per $ i 1,000 principal amount of the Convertible Notes due 2025 (equivalent to an initial conversion price of approximately $ i 40.96 per share of our Class A common stock) (the “Initial Conversion Rate”), at any time on or after July 15, 2025 through the second scheduled trading day preceding the maturity date. Holders of the Convertible Notes due 2025 will also have the right to convert the Convertible Notes due 2025 at the Initial Conversion Rate prior to July 15, 2025, but only upon the occurrence of specified events described in the related indenture. The conversion rate is subject to anti-dilution adjustments if certain events occur. Upon any conversion, we will settle our conversion obligation in cash, shares of our Class A common stock or a combination of cash and shares of our Class A common stock, at our election.
3 3/8% Convertible Notes due 2026
On August 8, 2016, we issued $ i 3.0 billion aggregate principal amount of the Convertible Notes due August 15, 2026 in a private offering. Interest accrues at an annual rate of 3 3/8% and is payable semi-annually in cash, in arrears on February 15 and August 15 of each year.
The Convertible Notes due 2026 are:
| ● | our general unsecured obligations; |
| ● | ranked senior in right of payment to any future indebtedness that is expressly subordinated in right of payment to the Convertible Notes due 2026; |
| ● | ranked equally in right of payment with all of our existing and future unsecured senior indebtedness; |
| ● | ranked effectively junior to any of our existing and future secured indebtedness to the extent of the value of the assets securing such indebtedness; |
| ● | ranked structurally junior to all indebtedness and other liabilities of our subsidiaries; and |
| ● | not guaranteed by our subsidiaries. |
We may not redeem the Convertible Notes due 2026 prior to the maturity date. If a “fundamental change” (as defined in the related indenture) occurs prior to the maturity date of the Convertible Notes due 2026, holders may require us to repurchase for cash all or part of their Convertible Notes due 2026 at a specified make-whole price equal to i 100% of the principal amount of such Convertible Notes due 2026, plus accrued and unpaid interest to, but not including, the fundamental change repurchase date.
The indenture related to the Convertible Notes due 2026 does not contain any financial covenants and does not restrict us from paying dividends, issuing or repurchasing our other securities, issuing new debt (including secured debt) or repaying or repurchasing our debt.
29
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Subject to the terms of the related indenture, the Convertible Notes due 2026 may be converted at an initial conversion rate of i 15.3429 shares of our Class A common stock per $ i 1,000 principal amount of Convertible Notes due 2026 (equivalent to an initial conversion price of approximately $ i 65.18 per share of our Class A common stock) (the “Initial Conversion Rate”), at any time on or after March 15, 2026 through the second scheduled trading day preceding the maturity date. Holders of the Convertible Notes due 2026 will also have the right to convert the Convertible Notes due 2026 at the Initial Conversion Rate prior to March 15, 2026, but only upon the occurrence of specified events described in the related indenture. The conversion rate is subject to anti-dilution adjustments if certain events occur. Upon any conversion, we will settle our conversion obligation in cash, shares of our Class A common stock or a combination of cash and shares of our Class A common stock, at our election.
Convertible Note Hedge and Warrant Transactions
In connection with the offering of the Convertible Notes due 2026, we entered into convertible note hedge transactions with certain option counterparties. The convertible note hedge transactions cover, subject to anti-dilution adjustments substantially similar to those applicable to the Convertible Notes due 2026, the number of shares of our Class A common stock underlying the Convertible Notes due 2026, which initially gives us the option to purchase approximately i 46 million shares of our Class A common stock at a price of approximately $ i 65.18 per share. The total cost of the convertible note hedge transactions was $ i 635 million. Concurrently with entering into the convertible note hedge transactions, we also entered into warrant transactions with each option counterparty whereby we sold to such option counterparty warrants to purchase, subject to customary anti-dilution adjustments, up to the same number of shares of our Class A common stock, which initially gives the option counterparties the option to purchase approximately i 46 million shares of our Class A common stock at a price of approximately $ i 86.08 per share.
We received $ i 376 million in cash proceeds from the sale of these warrants. For us, the economic effect of these transactions is to effectively raise the initial conversion price from approximately $ i 65.18 per share of our Class A common stock to approximately $ i 86.08 per share of our Class A common stock (thus effectively raising the conversion premium on the Convertible Notes due 2026 from approximately i 32.5% to approximately i 75%). In accordance with accounting guidance on hedge and warrant transactions, the net cost incurred in connection with the convertible note hedge and warrant transactions are recorded as a reduction in “Additional paid-in capital” within “Stockholders’ Equity (Deficit)” on our Consolidated Balance Sheets as of December 31, 2016.
We will not be required to make any cash payments to each option counterparty or its affiliates upon the exercise of the options that are a part of the convertible note hedge transactions, but will be entitled to receive from them a number of shares of Class A common stock, an amount of cash or a combination thereof. This consideration is generally based on the amount by which the market price per share of Class A common stock, as measured under the terms of the convertible note hedge transactions, is greater than the strike price of the convertible note hedge transactions during the relevant valuation period under the convertible note hedge transactions. Additionally, if the market price per share of Class A common stock, as measured under the terms of the warrant transactions, exceeds the strike price of the warrants during the measurement period at the maturity of the warrants, we will owe each option counterparty a number of shares of Class A common stock in an amount based on the excess of such market price per share of Class A common stock over the strike price of the warrants. However, as specified under the terms of the warrant transactions, we may elect to settle the warrants in cash.
30
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Intercompany Loan
The net proceeds from the offering of our 5 1/4% Senior Secured Notes due 2026 and our 5 3/4% Senior Secured Notes due 2028 (the “Senior Notes”) issued on November 26, 2021 were used by DISH DBS to make an intercompany loan to DISH Network pursuant to a Loan and Security Agreement dated November 26, 2021 (together with potential future advances to DISH Network, the “Intercompany Loan”) between DISH DBS and DISH Network in order to finance the purchase of wireless spectrum licenses and for general corporate purposes, including our 5G Network Deployment. The Intercompany Loan will mature in two tranches, with the first tranche maturing on December 1, 2026 (the “2026 Tranche”) and the second tranche maturing on December 1, 2028 (the “2028 Tranche”). DISH DBS may make additional advances to DISH Network under the Intercompany Loan, and on February 11, 2022, DISH DBS advanced an additional $ i 1.5 billion to DISH Network under the Intercompany Loan 2026 Tranche. Interest accrues and is payable semiannually, and interest payments with respect to the Intercompany Loan are, at our option, payable in kind for the first two years. In the third year, a minimum of i 50% of each interest payment due with respect to each tranche of the Intercompany Loan must be paid in cash. Thereafter, interest payments must be paid in cash. Interest will accrue: (a) when paid in cash, at a fixed rate of i 0.25% per annum in excess of the interest rate applicable to, in the case of the 2026 Tranche, the 5 1/4% Senior Secured Notes due 2026, and in the case of the 2028 Tranche, the 5 3/4% Senior Secured Notes due 2028 (each, the “Cash Accrual Rate” with respect to the applicable tranche); and (b) when paid in kind, at a rate of i 0.75% per annum in excess of the Cash Accrual Rate for the applicable tranche. As of September 30, 2023, the total Intercompany Loan amount outstanding plus interest paid in kind was $ i 7.382 billion. The cash proceeds of the Intercompany Loan of $ i 6.750 billion were paid to the FCC in connection with Weminuche’s winning bids in Auction 110. As a result, the Intercompany Loan is secured by Weminuche’s interest in the wireless spectrum licenses acquired in Auction 110 with such cash proceeds up to the total loan amount outstanding including interest paid in kind. The remaining balance of our winning bids of approximately $ i 455 million was paid from cash and marketable investment securities balances at that time, for a total of approximately $ i 7.205 billion. Under certain circumstances, DISH Network wireless spectrum licenses (valued based upon a third-party valuation) may be substituted for the collateral. The Intercompany Loan is not included as collateral for the Senior Secured Notes, and the Senior Secured Notes are subordinated to DISH DBS’s existing and certain future unsecured notes with respect to certain realizations under the Intercompany Loan and any collateral pledged as security for the Intercompany Loan.
i
31
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
10.Commitments and Contingencies
Commitments
Future maturities of our long-term debt, finance lease and contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022 have not changed materially, other than those disclosed below.
“Other long-term obligations” totaled $ i 14.134 billion as of September 30, 2023 and $ i 15.115 billion as of December 31, 2022. As of September 30, 2023, our future “Other long-term obligations” were as follows:
i
| | | | |
For the Years Ending December 31, | | Other Long-Term Obligations (1) | | |
| | | (In thousands) | |
2023 (remaining three months) | | $ | i 1,485,859 | |
2024 | | | i 2,668,442 | |
2025 | | | i 2,096,744 | |
2026 | | | i 1,840,438 | |
2027 | | | i 1,087,858 | |
Thereafter | | | i 4,955,117 | |
Total | | $ | i 14,134,458 | |
| | | | |
| (1) | Represents minimum contractual commitments related to communication tower obligations, certain 5G Network Deployment commitments, obligations under the NSA with AT&T and the MNSA with T-Mobile, certain wireless device purchases and marketing obligations, radios, software and integration services and satellite related and other obligations. |
In certain circumstances, the dates on which we are obligated to make these payments could be delayed.
We currently expect capital expenditures, excluding capitalized interest, for our 5G Network Deployment to be approximately $ i i i 10 / / billion, including amounts incurred in 2021, 2022 and in the first nine months of 2023, of which approximately $ i 1.858 billion is included in the table above in “Other long-term obligations.”
Agreements in Connection with the Asset Purchase Agreement
On July 1, 2020, we completed the Boost Mobile Acquisition. In connection with the closing of the Boost Mobile Acquisition, we and T-Mobile entered into, among other things, a spectrum purchase agreement for the option to purchase all of Sprint’s 800 MHz spectrum licenses for approximately $ i 3.59 billion (“License Purchase Agreement”). The $ i 3.59 billion is not included in “Other long-term obligations” above. If we elect to not exercise the option to purchase the 800 MHz spectrum licenses pursuant to the License Purchase Agreement or it expires, we were potentially subject to pay T-Mobile a fee of approximately $ i 72 million per the License Purchase Agreement, under certain circumstances. In conjunction with the Amendment that modifies the License Purchase Agreement, discussed below, the $ i 72 million fee has been superseded by the Upfront Payment.
On June 30, 2023, the DOJ provided notice to the District Court that, pursuant to its discretion under the Final Judgment, it granted a i 60-day extension of the deadline for T-Mobile to divest the 800 MHz spectrum licenses, which expired on August 30, 2023.
On August 17, 2023, we filed a petition with the District Court seeking an extension of the deadline for T-Mobile to divest the 800 MHz spectrum licenses.
32
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
On October 15, 2023, we and T-Mobile entered into the Amendment that, among other things, provides the Extension. In connection with the Extension, we agreed to make an Upfront Payment of $ i 100 million to T-Mobile. The Amendment also resolves all outstanding disputes between the parties with respect to the License Purchase Agreement.
The Amendment has been approved by the DOJ in accordance with the Stipulation and Order filed in the District Court on July 26, 2019 and the Final Judgment entered by the District Court on April 1, 2020. The Amendment became effective upon the District Court entering the Amended Final Judgment on October 23, 2023.
The Upfront Payment is fully creditable against the purchase price in the event we exercise our option to purchase the 800 MHz spectrum licenses from T-Mobile. T-Mobile has the right (but not the obligation) to pursue an alternative offer between now and April 1, 2024 provided that we retain the first right to purchase the spectrum before April 1, 2024. If we elect to not exercise the option to purchase the 800 MHz spectrum licenses pursuant to the License Purchase Agreement or it expires, T-Mobile will retain the $ i 100 million Upfront Payment per the Amendment.
As of September 30, 2023, we recorded the $ i 100 million Upfront Payment in “Other noncurrent assets, net” with the offsetting liability in “Other accrued expenses” on our Condensed Consolidated Balance Sheets. Subsequently, on October 25, 2023, we paid the $ i 100 million Upfront Payment to T-Mobile.
Wireless – 5G Network Deployment
We have invested a total of over $ i 30 billion in Wireless spectrum licenses, which includes over $ i 10 billion in noncontrolling investments in certain entities. The $ i 30 billion of investments related to Wireless spectrum licenses does not include $ i 8 billion of capitalized interest related to the carrying value of such licenses. See Note 2 for further information on capitalized interest.
We will need to raise additional capital in the future, which may not be available on favorable terms, to fund the efforts described below, as well as, among other things, make any potential Northstar Re-Auction Payment. There can be no assurance that we and/or the SNR Entities will be able to profitably deploy these Wireless spectrum licenses, which may affect the carrying amount of these assets and our future financial condition or results of operations.
33
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Wireless Spectrum Licenses
These Wireless spectrum licenses are subject to certain interim and final build-out requirements, as well as certain renewal requirements that are summarized in the table below:
i
| | | | | | | | | | |
| | Carrying | | Build-Out Deadlines | | Expiration | | |||
| | Amount | | Interim | | Final | | Date | | |
| | (In thousands) | | | | | | | | |
Owned: | | | | | | | | | | |
DBS Licenses (1) | | $ | i 677,409 | | | | | | | |
700 MHz Licenses (2) | | | i 711,871 | | | | June 14, 2025 (3) | | June 2023 (4) | |
AWS-4 Licenses (2) | | | i 1,940,000 | | | | June 14, 2025 (3) | | June 2023 (4) | |
H Block Licenses (2) | | | i 1,671,506 | | | | June 14, 2025 (5) | | June 2023 (4) | |
600 MHz Licenses | | | i 6,213,335 | | | | June 14, 2025 (6) | | June 2029 | |
MVDDS Licenses (1) | | | i 24,000 | | | | | | August 2024 | |
LMDS Licenses (1) | | | — | | | | | | September 2028 | |
28 GHz Licenses | | | i 2,883 | | | | October 2, 2029 (7) | | October 2029 | |
24 GHz Licenses | | | i 11,772 | | | | | December 2029 | | |
37 GHz, 39 GHz and 47 GHz Licenses | | | i 202,533 | | | | June 4, 2030 (7) | | June 2030 | |
3550-3650 MHz Licenses | | | i 912,939 | | | | March 12, 2031 (7) | | March 2031 | |
3.7-3.98 GHz Licenses | | | i 2,762 | | July 23, 2029 (7) | | July 23, 2033 (7) | | July 2036 | |
3.45–3.55 GHz Licenses | | | i 7,327,989 | | May 4, 2026 (7) | | May 4, 2030 (7) | | May 2037 | |
1695-1710 MHz, 1755-1780 MHz, and 2155-2180 MHz | | | i 972 | | | | March 30, 2024 (8) | | March 2026 | |
Subtotal | | | i 19,699,971 | | | | | | | |
Noncontrolling Investments: | | | | | | | | | | |
Northstar (10) | | | i 5,618,930 | | | | October 2025 (9) | | October 2025 (9) | |
SNR | | | i 4,271,459 | | | | October 2025 (9) | | October 2025 (9) | |
Total AWS-3 Licenses | | | i 9,890,389 | | | | | | | |
| | | | | | | | | | |
Capitalized Interest (11) | | | i 8,227,581 | | | | | | | |
Total as of September 30, 2023 | | $ | i 37,817,941 | | | | | | | |
| | | | | | | | | | |
| (1) | The build-out deadlines for these licenses have been met. |
| (2) | The interim build-out deadlines for these licenses have been met. |
| (3) | In a July 14, 2023 filing to the FCC, we certified that we were offering 5G broadband service to at least i 70% of the United States population as of June 14, 2023, and certified to meeting other FCC related commitments. As a result of us providing 5G broadband service to over i 50% of the U.S. population by June 14, 2023, the final build-out deadlines have been extended automatically to June 14, 2025. For these licenses, we must offer 5G broadband service to at least i 70% of the population in each Economic Area (which is a service area established by the FCC). On September 29, 2023, the FCC confirmed we have met all of our June 14, 2023 band-specific 5G deployment commitments, and two of our three nationwide 5G commitments. The single remaining 5G commitment, that at least i 70% of the U.S. population has access to average download speeds equal to 35 Mbps, will be confirmed using the drive test methodology agreed to and approved by the FCC. We have six months from September 29, 2023 to complete this drive test. |
| (4) | We have timely filed a renewal application, and the FCC confirmed in a letter dated September 29, 2023 that it will update its licensing records to reflect these automatic extensions to June 2025. |
/34
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
| (5) | In a July 14, 2023 filing to the FCC, we certified that we were offering 5G broadband service to at least i 70% of the United States population as of June 14, 2023, and certified to meeting other FCC related commitments. As a result of us providing 5G broadband service to over i 50% of the U.S. population by June 14, 2023, the final build-out deadlines have been extended automatically to June 14, 2025. For these licenses, we must offer 5G broadband service to at least i 75% of the population in each Economic Area (which is a service area established by the FCC). On September 29, 2023, the FCC confirmed we have met all of our June 14, 2023 band-specific 5G deployment commitments, and two of our three nationwide 5G commitments. The single remaining 5G commitment, that at least i 70% of the U.S. population has access to average download speeds equal to 35 Mbps, will be confirmed using the drive test methodology agreed to and approved by the FCC. We have six months from September 29, 2023 to complete this drive test. |
| (6) | For these licenses, we must offer 5G broadband service to at least i 75% of the population in each Partial Economic Area (which is a service area established by the FCC) by this date. We have also acquired certain additional 600 MHz licenses through private transactions. These licenses are currently subject to their original FCC buildout deadlines. |
| (7) | There are a variety of build-out options and associated build-out metrics associated with these licenses. |
| (8) | For these licenses, we must provide reliable signal coverage and offer service to at least i 75% of the population of each license area by this date. |
| (9) | For these licenses, Northstar Wireless and SNR Wireless must provide reliable signal coverage and offer service to at least i 75% of the population of each license area by this date. The AWS-3 interim build-out requirement was not met and as a result, the AWS-3 expiration date and the AWS-3 final build-out requirement have been accelerated by i two years (from October 2027 to October 2025) for each AWS-3 License area in which Northstar Wireless and SNR Wireless did not meet the requirement. |
| (10) | Subsequent to September 30, 2023, the FCC consented to the sale of Northstar Manager’s ownership interests in Northstar Spectrum, which we purchased for a total of approximately $ i 109 million on October 12, 2023. This purchase resulted in the elimination of all of our noncontrolling investment as it related to Northstar Spectrum as of the purchase date and we continue to consolidate the Northstar Entities as wholly-owned subsidiaries. |
| (11) | See Note 2 for further information. |
Commercialization of Our Wireless Spectrum Licenses and Related Assets. We plan to commercialize our Wireless spectrum licenses through our 5G Network Deployment. We have committed to deploy our 5G Network capable of serving increasingly larger portions of the U.S. population at different deadlines, including i 20% of the U.S. population by June 2022 and i 70% of the U.S. population by June 2023. If by June 2023, we are offering 5G broadband service to at least i 50% of the U.S. population but less than i 70% of the U.S. population, the i 70% June 2023 deadline will be extended automatically to June 2025; however, as a result, we may, under certain circumstances, potentially be subject to certain penalties. On June 14, 2022, we announced we had successfully reached our i 20% population coverage requirement. In addition, we announced and certified to the FCC that as of June 14, 2023, we offer 5G broadband service to over i 73% of the U.S. population, or more than i 246 million Americans nationwide, and have deployed over i 16,000 5G cell sites. On September 29, 2023, the FCC confirmed we have met all of our June 14, 2023 band-specific 5G deployment commitments, and two of our three nationwide 5G commitments. The single remaining 5G commitment, that at least i 70% of the U.S. population has access to average download speeds equal to 35 Mbps, will be confirmed using the drive test methodology agreed to and approved by the FCC. We have six months from September 29, 2023 to complete this drive test. We now have the largest commercial deployment of 5G VoNR in the world, reaching more than i 100 million Americans in over i 60 markets, and we are launching new markets every month. We currently expect capital expenditures, excluding capitalized interest, for our 5G Network Deployment to be approximately $ i i i 10 / / billion, including amounts incurred in 2021, 2022 and the first nine months of 2023. See Note 2 for further information.
As a result of us providing 5G broadband service to over i 50% of the U.S. population by June 14, 2023, the final build-out deadlines have been extended automatically to June 14, 2025 for us to offer 5G broadband service to at least i 70% of the population in each Economic Area for the 700 MHz Licenses and AWS-4 Licenses and at least i 75% of the population in each Economic Area for the H Block Licenses.
35
DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
We may need to make significant additional investments or partner with others to, among other things, continue our 5G Network Deployment and further commercialize, build-out and integrate these licenses and related assets and any additional acquired licenses and related assets, as well as to comply with regulations applicable to such licenses. Depending on the nature and scope of such activities, any such investments or partnerships could vary significantly. In addition, as we continue our 5G Network Deployment, we have and may continue to incur significant additional expenses related to, among other things, research and development, wireless testing and ongoing upgrades to the wireless network infrastructure, software and third-party integration. As a result of these investments, among other factors, we plan to raise additional capital, which may not be available on favorable terms. See Note 9 for further information. We may also determine that additional wireless spectrum licenses may be required for our 5G Network Deployment and to compete effectively with other wireless service providers.
DISH Network Noncontrolling Investments in the Northstar Entities and the SNR Entities Related to AWS-3 Wireless Spectrum Licenses
Noncontrolling Investments
During 2015, through our wholly-owned subsidiaries American II and American III, we initially made over $ i 10 billion in certain noncontrolling investments in Northstar Spectrum, the parent company of Northstar Wireless, and in SNR HoldCo, the parent company of SNR Wireless, respectively. Under the applicable accounting guidance in ASC 810, Northstar Spectrum and SNR HoldCo are considered VIEs and, based on the characteristics of the structure of these entities and in accordance with the applicable accounting guidance, we consolidate these entities into our financial statements. See Note 2 for further information.
Northstar Investment. As of 2015, through American II, we owned a noncontrolling interest in Northstar Spectrum, which was comprised of i 85% of the Class B Common Interests and i 100% of the Class A Preferred Interests of Northstar Spectrum. Northstar Manager is the sole manager of Northstar Spectrum and owns a controlling interest in Northstar Spectrum, which was comprised of i 15% of the Class B Common Interests of Northstar Spectrum. As of March 31, 2018, the total equity contributions from American II and Northstar Manager to Northstar Spectrum were approximately $ i 7.621 billion and $ i 133 million, respectively. As of March 31, 2018, the total loans from American II to Northstar Wireless under the Northstar Credit Agreement (as defined below) for payments to the FCC related to the Northstar Licenses (as defined below) were approximately $ i 500 million. See below for further information.
Northstar Purchase Agreement. On December 30, 2020, through our wholly-owned subsidiary American II, we entered into a Purchase Agreement (the “Northstar Purchase Agreement”) with Northstar Manager and Northstar Spectrum, pursuant to which American II purchased i 80% of Northstar Manager’s Class B Common Interests in Northstar Spectrum (the “Northstar Transaction”) for a purchase price of approximately $ i 312 million. As a result of the Northstar Transaction, through American II, we hold i 97% of the Class B Common Interests in Northstar Spectrum and Northstar Manager holds i 3% of the Class B Common Interests in Northstar Spectrum. Other than the change in ownership percentage of Northstar Spectrum, the Northstar Transaction did not modify or amend in any way the existing arrangements between or among the Northstar parties.
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(Unaudited)
SNR Investment. As of 2015, through American III, we own a noncontrolling interest in SNR HoldCo, which is comprised of i 85% of the Class B Common Interests and i 100% of the Class A Preferred Interests of SNR HoldCo. SNR Management is the sole manager of SNR HoldCo and owns a controlling interest in SNR HoldCo, which is comprised of i 15% of the Class B Common Interests of SNR HoldCo. As of March 31, 2018, the total equity contributions from American III and SNR Management to SNR HoldCo were approximately $ i 5.590 billion and $ i 93 million, respectively. As of March 31, 2018, the total loans from American III to SNR Wireless under the SNR Credit Agreement (as defined below) for payments to the FCC related to the SNR Licenses (as defined below) were approximately $ i 500 million. See below for further information.
AWS-3 Auction
Northstar Wireless and SNR Wireless each filed applications with the FCC to participate in Auction 97 (the “AWS-3 Auction”) for the purpose of acquiring certain AWS-3 Licenses. Each of Northstar Wireless and SNR Wireless applied to receive bidding credits of i 25% as designated entities under applicable FCC rules. Northstar Wireless was the winning bidder for AWS-3 Licenses with gross winning bid amounts totaling approximately $ i 7.845 billion, which after taking into account a i 25% bidding credit, was approximately $ i 5.884 billion. SNR Wireless was the winning bidder for AWS-3 Licenses with gross winning bid amounts totaling approximately $ i 5.482 billion, which after taking into account a i 25% bidding credit, was approximately $ i 4.112 billion. In addition to the net winning bids, SNR Wireless made a bid withdrawal payment of approximately $ i 8 million.
FCC Order and October 2015 Arrangements. On August 18, 2015, the FCC released a Memorandum Opinion and Order, FCC 15-104 (the “Order”) in which the FCC determined, among other things, that DISH Network has a controlling interest in, and is an affiliate of, Northstar Wireless and SNR Wireless, and therefore DISH Network’s revenues should be attributed to them, which in turn makes Northstar Wireless and SNR Wireless ineligible to receive the i 25% bidding credits (approximately $ i 1.961 billion for Northstar Wireless and $ i 1.370 billion for SNR Wireless). On November 23, 2020, the FCC released a Memorandum Opinion and Order on Remand, FCC 20-160, that found that Northstar Wireless and SNR Wireless are not eligible for bidding credits based on the FCC’s determination that they remain under DISH Network’s de facto control. Northstar Wireless and SNR Wireless have appealed the FCC’s order to the D.C. Circuit Court of Appeals. On June 21, 2022, the United States Court of Appeals for the District of Columbia issued an Opinion rejecting this challenge. On January 17, 2023, Northstar Wireless filed a petition for a writ of certiorari asking the United States Supreme Court to hear a further appeal, but that petition was denied on June 30, 2023.
Letters Exchanged between Northstar Wireless and the FCC Wireless Bureau. As outlined in letters exchanged between Northstar Wireless and the Wireless Telecommunications Bureau of the FCC (the “FCC Wireless Bureau”), Northstar Wireless paid the gross winning bid amounts for i 261 AWS-3 Licenses (the “Northstar Licenses”) totaling approximately $ i 5.619 billion through the application of funds already on deposit with the FCC. Northstar Wireless also notified the FCC that it would not be paying the gross winning bid amounts for i 84 AWS-3 Licenses totaling approximately $ i 2.226 billion. As a result of the nonpayment of those gross winning bid amounts, the FCC retained those licenses and Northstar Wireless owed the FCC an additional interim payment of approximately $ i 334 million (the “Northstar Interim Payment”), which is equal to i 15% of $ i 2.226 billion. The Northstar Interim Payment was recorded as an expense during the fourth quarter of 2015. Northstar Wireless immediately satisfied the Northstar Interim Payment through the application of funds already on deposit with the FCC and an additional loan from American II of approximately $ i 69 million. As a result, the FCC will not deem Northstar Wireless to be a “current defaulter” under applicable FCC rules.
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(Unaudited)
In addition, the FCC Wireless Bureau acknowledged that Northstar Wireless’ nonpayment of those gross winning bid amounts does not constitute action involving gross misconduct, misrepresentation or bad faith. Therefore, the FCC concluded that such nonpayment will not affect the eligibility of Northstar Wireless, its investors (including DISH Network) or their respective affiliates to participate in future spectrum auctions (including Auction 1000 and any re-auction of the AWS-3 licenses retained by the FCC). At this time, DISH Network (through itself, a subsidiary or another entity in which it may hold a direct or indirect interest) expects to participate in any re-auction of those AWS-3 licenses.
If the winning bids from re-auction or other award of the AWS-3 licenses retained by the FCC are greater than or equal to the winning bids of Northstar Wireless, no additional amounts will be owed to the FCC. However, if those winning bids are less than the winning bids of Northstar Wireless, then Northstar Wireless will be responsible for the difference less any overpayment of the Northstar Interim Payment (which will be recalculated as i 15% of the winning bids from re-auction or other award) (the “Northstar Re-Auction Payment”). For example, if the winning bids in a re-auction are $1, the Northstar Re-Auction Payment would be approximately $ i 1.892 billion, which is calculated as the difference between $ i 2.226 billion (the Northstar winning bid amounts) and $1 (the winning bids from re-auction) less the resulting $ i 334 million overpayment of the Northstar Interim Payment. As discussed above, at this time, DISH Network (through itself, a subsidiary or another entity in which it may hold a direct or indirect interest) expects to participate in any re-auction. We cannot predict with any degree of certainty the timing or outcome of any re-auction or the amount of any Northstar Re-Auction Payment.
DISH Network Guaranty in Favor of the FCC for Certain Northstar Wireless Obligations. On October 1, 2015, DISH Network entered into a guaranty in favor of the FCC (the “FCC Northstar Guaranty”) with respect to the Northstar Interim Payment (which was satisfied on October 1, 2015) and any Northstar Re-Auction Payment. The FCC Northstar Guaranty provides, among other things, that during the period between the due date for the payments guaranteed under the FCC Northstar Guaranty and the date such guaranteed payments are paid: (i) Northstar Wireless’ payment obligations to American II under the Northstar Credit Agreement will be subordinated to such guaranteed payments; and (ii) DISH Network or American II will withhold exercising certain rights as a creditor of Northstar Wireless.
Letters Exchanged between SNR Wireless and the FCC Wireless Bureau. As outlined in letters exchanged between SNR Wireless and the FCC Wireless Bureau, SNR Wireless paid the gross winning bid amounts for i 244 AWS-3 Licenses (the “SNR Licenses”) totaling approximately $ i 4.271 billion through the application of funds already on deposit with the FCC and a portion of an additional loan from American III in an aggregate amount of approximately $ i 344 million (which included an additional bid withdrawal payment of approximately $ i 3 million). SNR Wireless also notified the FCC that it would not be paying the gross winning bid amounts for i 113 AWS-3 Licenses totaling approximately $ i 1.211 billion. As a result of the nonpayment of those gross winning bid amounts, the FCC retained those licenses and SNR Wireless owed the FCC an additional interim payment of approximately $ i 182 million (the “SNR Interim Payment”), which is equal to i 15% of $ i 1.211 billion. The SNR Interim Payment was recorded as an expense during the fourth quarter of 2015. SNR Wireless immediately satisfied the SNR Interim Payment through a portion of an additional loan from American III in an aggregate amount of approximately $ i 344 million. As a result, the FCC will not deem SNR Wireless to be a “current defaulter” under applicable FCC rules.
In addition, the FCC Wireless Bureau acknowledged that SNR Wireless’ nonpayment of those gross winning bid amounts does not constitute action involving gross misconduct, misrepresentation or bad faith. Therefore, the FCC concluded that such nonpayment will not affect the eligibility of SNR Wireless, its investors (including DISH Network) or their respective affiliates to participate in future spectrum auctions (including Auction 1000 and any re-auction of the AWS-3 licenses retained by the FCC). At this time, DISH Network (through itself, a subsidiary or another entity in which it may hold a direct or indirect interest) expects to participate in any re-auction of those AWS-3 licenses.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
If the winning bids from re-auction or other award of the AWS-3 licenses retained by the FCC are greater than or equal to the winning bids of SNR Wireless, no additional amounts will be owed to the FCC. However, if those winning bids are less than the winning bids of SNR Wireless, then SNR Wireless will be responsible for the difference less any overpayment of the SNR Interim Payment (which will be recalculated as i 15% of the winning bids from re-auction or other award) (the “SNR Re-Auction Payment”). For example, if the winning bids in a re-auction are $1, the SNR Re-Auction Payment would be approximately $ i 1.029 billion, which is calculated as the difference between $ i 1.211 billion (the SNR winning bid amounts) and $1 (the winning bids from re-auction) less the resulting $ i 182 million overpayment of the SNR Interim Payment. As discussed above, at this time, DISH Network (through itself, a subsidiary or another entity in which it may hold a direct or indirect interest) expects to participate in any re-auction. We cannot predict with any degree of certainty the timing or outcome of any re-auction or the amount of any SNR Re-Auction Payment.
DISH Network Guaranty in Favor of the FCC for Certain SNR Wireless Obligations. On October 1, 2015, DISH Network entered into a guaranty in favor of the FCC (the “FCC SNR Guaranty”) with respect to the SNR Interim Payment (which was satisfied on October 1, 2015) and any SNR Re-Auction Payment. The FCC SNR Guaranty provides, among other things, that during the period between the due date for the payments guaranteed under the FCC SNR Guaranty and the date such guaranteed payments are paid: (i) SNR Wireless’ payment obligations to American III under the SNR Credit Agreement will be subordinated to such guaranteed payments; and (ii) DISH Network or American III will withhold exercising certain rights as a creditor of SNR Wireless.
FCC Licenses. On October 27, 2015, the FCC granted the Northstar Licenses to Northstar Wireless and the SNR Licenses to SNR Wireless, respectively, which are recorded in “FCC authorizations” on our Condensed Consolidated Balance Sheets. The AWS-3 Licenses are subject to certain interim and final build-out requirements. By October 2021, Northstar Wireless and SNR Wireless must provide reliable signal coverage and offer service to at least i 40% of the population in each area covered by an individual AWS-3 License (the “AWS-3 Interim Build-Out Requirement”). By October 2027, Northstar Wireless and SNR Wireless must provide reliable signal coverage and offer service to at least i 75% of the population in each area covered by an individual AWS-3 License (the “AWS-3 Final Build-Out Requirement”). The AWS-3 Interim Build-Out Requirement was not met and as a result, the AWS-3 License term and the AWS-3 Final Build-Out Requirement have been accelerated by i two years (from October 2027 to October 2025) for each AWS-3 License area in which Northstar Wireless and SNR Wireless did not meet the requirement. If the AWS-3 Final Build-Out Requirement is not met, the authorization for each AWS-3 License area in which Northstar Wireless and SNR Wireless do not meet the requirement may terminate. These wireless spectrum licenses expire in October 2027 unless they are renewed by the FCC. There can be no assurance that the FCC will renew these wireless spectrum licenses.
Qui Tam. On September 23, 2016, the United States District Court for the District of Columbia unsealed a qui tam complaint that was filed by Vermont National Telephone Company (“Vermont National”) against us; our wholly-owned subsidiaries, American AWS-3 Wireless I L.L.C., American II, American III, and DISH Wireless Holding L.L.C.; Charles W. Ergen (our Chairman) and Cantey M. Ergen (a member of our Board of Directors); Northstar Wireless; Northstar Spectrum; Northstar Manager; SNR Wireless; SNR HoldCo; SNR Management; and certain other parties. See “Contingencies – Litigation – Vermont National Telephone Company” for further information.
D.C. Circuit Court Opinion. On August 29, 2017, the United States Court of Appeals for the District of Columbia Circuit (the “D.C. Circuit”) in SNR Wireless LicenseCo, LLC, et al. v. Federal Communications Commission, 868 F.3d 1021 (D.C. Cir. 2017) (the “Appellate Decision”) affirmed the Order in part, and remanded the matter to the FCC to give Northstar Wireless and SNR Wireless an opportunity to seek to negotiate a cure of the issues identified by the FCC in the Order (a “Cure”). On January 26, 2018, SNR Wireless and Northstar Wireless filed a petition for a writ of certiorari, asking the United States Supreme Court to hear an appeal from the Appellate Decision, which the United States Supreme Court denied on June 25, 2018.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Order on Remand. On January 24, 2018, the FCC released an Order on Remand, DA 18-70 (the “Order on Remand”) purporting to establish a procedure to afford Northstar Wireless and SNR Wireless the opportunity to implement a Cure pursuant to the Appellate Decision. On June 8, 2018, Northstar Wireless and SNR Wireless each filed amended agreements to demonstrate that, in light of such changes, each of Northstar Wireless and SNR Wireless qualified for the very small business bidding credit that it sought in the AWS-3 Auction. Northstar Wireless and SNR Wireless filed a Joint Application for Review of the Order on Remand requesting, among other things, an iterative negotiation process with the FCC regarding a Cure, which was denied on July 12, 2018. The pleading cycle established in the Order on Remand concluded in October 2018. On November 23, 2020, the FCC issued a Memorandum Opinion and Order that concluded, among other things, that DISH Network retained de facto control over Northstar Wireless and SNR Wireless and denied the very small business bidding credit sought by Northstar Wireless and SNR Wireless, even though the parties had eliminated or significantly modified every provision previously deemed to have been disqualifying by the FCC. Northstar Wireless and SNR Wireless timely filed an appeal of the FCC’s 2020 decision. On June 21, 2022, the United States Court of Appeals for the District of Columbia issued an Opinion rejecting this challenge. On January 17, 2023, Northstar Wireless filed a petition for a writ of certiorari asking the United States Supreme Court to hear a further appeal, but that petition was denied on June 30, 2023.
Northstar Operative Agreements
Northstar LLC Agreement. Northstar Spectrum is governed by a limited liability company agreement by and between American II and Northstar Manager (the “Northstar Spectrum LLC Agreement”). Pursuant to the Northstar Spectrum LLC Agreement, American II and Northstar Manager made pro-rata equity contributions in Northstar Spectrum.
On March 31, 2018, American II, Northstar Spectrum, and Northstar Manager amended and restated the Northstar Spectrum LLC Agreement, to, among other things: (i) exchange $ i 6.870 billion of the amounts outstanding and owed by Northstar Wireless to American II pursuant to the Northstar Credit Agreement (as defined below) for i 6,870,493 Class A Preferred Interests in Northstar Spectrum (the “Northstar Preferred Interests”); (ii) replace the existing investor protection provisions with the investor protections described by the FCC in Baker Creek Communications, LLC, Memorandum Opinion and Order, 13 FCC Rcd 18709, 18715 (1998); (iii) delete the obligation of Northstar Manager to consult with American II regarding budgets and business plans; and (iv) remove the requirement that Northstar Spectrum’s systems be interoperable with ours. The Northstar Preferred Interests: (a) are non-voting; (b) have a i 12 percent mandatory quarterly distribution, which can be paid in cash or additional face amount of Northstar Preferred Interests at the sole discretion of Northstar Manager; and (c) have a liquidation preference equal to the then-current face amount of the Northstar Preferred Interests plus accrued and unpaid mandatory quarterly distributions in the event of certain liquidation events or deemed liquidation events (e.g., a merger or dissolution of Northstar Spectrum, or a sale of substantially all of Northstar Spectrum’s assets). As a result of the exchange noted in (i) above, a principal amount of $ i 500 million of debt remains under the Northstar Credit Agreement, as described below.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
On June 7, 2018, American II, Northstar Spectrum, and Northstar Manager amended and restated the Second Amended and Restated Limited Liability Company Agreement, dated March 31, 2018, by and among American II, Northstar Spectrum, and Northstar Manager, to, among other things: (i) reduce the mandatory quarterly distribution for the Northstar Preferred Interests from i 12 percent to i eight percent from and after June 7, 2018; (ii) increase the window for Northstar Manager to “put” its interest in Northstar Spectrum to Northstar Spectrum after October 27, 2020 from i 30 days to i 90 days; (iii) provide an additional i 90-day window for Northstar Manager to put its interest in Northstar Spectrum to Northstar Spectrum commencing on October 27, 2021; (iv) provide a right for Northstar Manager to require an appraisal of the fair market value of its interest in Northstar Spectrum at any time from October 27, 2022 through October 27, 2024, coupled with American II having the right to accept the offer to sell from Northstar Manager; (v) allow Northstar Manager to sell its interest in Northstar Spectrum without American II’s consent any time after October 27, 2020 (previously October 27, 2025); (vi) allow Northstar Spectrum to conduct an initial public offering without American II’s consent any time after October 27, 2022 (previously October 27, 2029); (vii) remove American II’s rights of first refusal with respect to Northstar Manager’s sale of its interest in Northstar Spectrum or Northstar Spectrum’s sale of any AWS-3 Licenses; and (viii) remove American II’s tag along rights with respect to Northstar Manager’s sale of its interest in Northstar Spectrum. Northstar Manager had the right to put its interest in Northstar Spectrum to Northstar Spectrum for a i 90-day period beginning October 27, 2020, which Northstar Manager waived in connection with the Northstar Purchase Agreement.
On January 24, 2022, American II, Northstar Spectrum, and Northstar Manager amended and restated the Third Amended and Restated Limited Liability Company Agreement, dated June 7, 2018, by and among American II, Northstar Spectrum, and Northstar Manager, to, among other things: (i) increase the second window for Northstar Manager to “put” its interest in Northstar Spectrum to Northstar Spectrum after October 27, 2021 from i 90 days to i 270 days.
On July 22, 2022, American II, Northstar Spectrum, and Northstar Manager amended and restated the Third Amended and Restated Limited Liability Company Agreement, dated June 7, 2018, by and among American II, Northstar Spectrum, and Northstar Manager, to, among other things, increase the second window for Northstar Manager to “put” its interest in Northstar Spectrum to Northstar Spectrum after July 24, 2022 from i 270 days to i 360 days. On October 21, 2022, we, through our wholly-owned subsidiary American II received notice that Northstar Manager exercised the Northstar Put Right effective as of October 21, 2022. The value of the Northstar Put Right has accrued to approximately $ i i 109 / million as of September 30, 2023. The consummation of the sale was subject to consent by the FCC, which occurred on October 10, 2023. Subsequently, on October 12, 2023, we completed the purchase of Northstar Manager’s ownership interests in Northstar Spectrum, for approximately $ i 109 million. This purchase resulted in the elimination of all of our redeemable noncontrolling interest as it related to Northstar Spectrum as of the purchase date and we continue to consolidate the Northstar Entities as wholly-owned subsidiaries.
Northstar Wireless Credit Agreement. On October 1, 2015, American II, Northstar Wireless and Northstar Spectrum amended the First Amended and Restated Credit Agreement dated October 13, 2014, by and among American II, as Lender, Northstar Wireless, as Borrower, and Northstar Spectrum, as Guarantor (as amended, the “Northstar Credit Agreement”), to provide, among other things, that: (i) the Northstar Interim Payment and any Northstar Re-Auction Payment will be made by American II directly to the FCC and will be deemed as loans under the Northstar Credit Agreement; (ii) the FCC is a third-party beneficiary with respect to American II’s obligation to pay the Northstar Interim Payment and any Northstar Re-Auction Payment; (iii) in the event that the winning bids from re-auction or other award of the AWS-3 licenses retained by the FCC are less than the winning bids of Northstar Wireless, the purchaser, assignee or transferee of any AWS-3 Licenses from Northstar Wireless is obligated to pay its pro-rata share of the difference (and Northstar Wireless remains jointly and severally liable for such pro-rata share); and (iv) during the period between the due date for the payments guaranteed under the FCC Northstar Guaranty (as discussed below) and the date such guaranteed payments are paid, Northstar Wireless’ payment obligations to American II under the Northstar Credit Agreement will be subordinated to such guaranteed payments.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
On March 31, 2018, American II, Northstar Wireless, and Northstar Spectrum amended and restated the Northstar Credit Agreement, to, among other things: (i) lower the interest rate on the remaining $ i 500 million principal balance under the Northstar Credit Agreement from i 12 percent per annum to i six percent per annum; (ii) eliminate the higher interest rate that would apply in the case of an event of default; and (iii) modify and/or remove certain obligations of Northstar Wireless to prepay the outstanding loan amounts.
On June 7, 2018, American II, Northstar Wireless, and Northstar Spectrum amended and restated the Northstar Credit Agreement to, among other things: (i) extend the maturity date on the remaining loan balance from i seven years to i ten years; and (ii) remove the obligation of Northstar Wireless to obtain American II’s consent for unsecured financing and equipment financing in excess of $ i 25 million.
SNR Operative Agreements
SNR LLC Agreement. SNR HoldCo is governed by a limited liability company agreement by and between American III and SNR Management (the “SNR HoldCo LLC Agreement”). Pursuant to the SNR HoldCo LLC Agreement, American III and SNR Management made pro-rata equity contributions in SNR HoldCo.
On March 31, 2018, American III, SNR Holdco, SNR Wireless Management, and John Muleta amended and restated the SNR HoldCo LLC Agreement, to, among other things: (i) exchange $ i 5.065 billion of the amounts outstanding and owed by SNR Wireless to American III pursuant to the SNR Credit Agreement (as defined below) for i 5,065,415 Class A Preferred Interests in SNR Holdco (the “SNR Preferred Interests”); (ii) replace the existing investor protection provisions with the investor protections described by the FCC in Baker Creek Communications, LLC, Memorandum Opinion and Order, 13 FCC Rcd 18709, 18715 (1998); (iii) delete the obligation of SNR Management to consult with American III regarding budgets and business plans; and (iv) remove the requirement that SNR Management’s systems be interoperable with ours. The SNR Preferred Interests: (a) are non-voting; (b) have a i 12 percent mandatory quarterly distribution, which can be paid in cash or additional face amount of SNR Preferred Interests at the sole discretion of SNR Management; and (c) have a liquidation preference equal to the then-current face amount of the SNR Preferred Interests plus accrued and unpaid mandatory quarterly distributions in the event of certain liquidation events or deemed liquidation events (e.g., a merger or dissolution of SNR Holdco, or a sale of substantially all of SNR Holdco’s assets). As a result of the exchange noted in (i) above, a principal amount of $ i 500 million of debt remains under the SNR Credit Agreement, as described below.
On June 7, 2018, American III, SNR Holdco, SNR Management, and John Muleta amended and restated the Second Amended and Restated Limited Liability Company Agreement, dated March 31, 2018, by and among American III, SNR Holdco, SNR Management and John Muleta, to, among other things: (i) reduce the mandatory quarterly distribution for the SNR Preferred Interests from i 12 percent to i eight percent from and after June 7, 2018; (ii) increase the window for SNR Management to “put” its interest in SNR Holdco to SNR Holdco after October 27, 2020 from i 30 days to i 90 days; (iii) provide an additional i 90-day window for SNR Management to put its interest in SNR Holdco to SNR Holdco commencing on October 27, 2021; (iv) provide a right for SNR Management to require an appraisal of the fair market value of its interest in SNR Holdco at any time from October 27, 2022 through October 27, 2024, coupled with American III having the right to accept the offer to sell from SNR Management; (v) allow SNR Management to sell its interest in SNR Holdco without American III’s consent any time after October 27, 2020 (previously October 27, 2025); (vi) allow SNR Holdco to conduct an initial public offering without American III’s consent any time after October 27, 2022 (previously October 27, 2029); (vii) remove American III’s rights of first refusal with respect to SNR Management’s sale of its interest in SNR Holdco or SNR Holdco’s sale of any AWS-3 Licenses; and (viii) remove American III’s tag along rights with respect to SNR Management’s sale of its interest in SNR Holdco. SNR Management had the right to put its interest in SNR Holdco to SNR Holdco for a i 90-day period from October 27, 2020. The First SNR Put Window closed in the first quarter of 2021, was not exercised and expired in January 2021.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
On November 15, 2021, we, through our wholly-owned subsidiary American III received notice that SNR Management exercised the SNR Put Right effective as of November 15, 2021. The value of the SNR Put Right has accrued to approximately $ i 420 million as of September 30, 2023. The consummation of the sale is subject to consent by the FCC. We expect to fund this obligation from cash and marketable investment securities balances at that time.
SNR Credit Agreement. On October 1, 2015, American III, SNR Wireless and SNR HoldCo amended the First Amended and Restated Credit Agreement dated October 13, 2014, by and among American III, as Lender, SNR Wireless, as Borrower, and SNR HoldCo, as Guarantor (as amended, the “SNR Credit Agreement”), to provide, among other things, that: (i) the SNR Interim Payment and any SNR Re-Auction Payment will be made by American III directly to the FCC and will be deemed as loans under the SNR Credit Agreement; (ii) the FCC is a third-party beneficiary with respect to American III’s obligation to pay the SNR Interim Payment and any SNR Re-Auction Payment; (iii) in the event that the winning bids from re-auction or other award of the AWS-3 licenses retained by the FCC are less than the winning bids of SNR Wireless, the purchaser, assignee or transferee of any AWS-3 Licenses from SNR Wireless is obligated to pay its pro-rata share of the difference (and SNR Wireless remains jointly and severally liable for such pro-rata share); and (iv) during the period between the due date for the payments guaranteed under the FCC SNR Guaranty (as discussed below) and the date such guaranteed payments are paid, SNR Wireless’ payment obligations to American III under the SNR Credit Agreement will be subordinated to such guaranteed payments.
On March 31, 2018, American III, SNR Wireless, and SNR Holdco amended and restated the SNR Credit Agreement, to, among other things: (i) lower the interest rate on the remaining $ i 500 million principal balance under the SNR Credit Agreement from i 12 percent per annum to i six percent per annum; (ii) eliminate the higher interest rate that would apply in the case of an event of default; and (iii) modify and/or remove certain obligations of SNR Wireless to prepay the outstanding loan amounts.
On June 7, 2018, American III, SNR Wireless, and SNR Holdco amended and restated the SNR Credit Agreement to, among other things: (i) extend the maturity date on the remaining loan balance from i seven years to i ten years; and (ii) remove the obligation of SNR Wireless to obtain American III’s consent for unsecured financing and equipment financing in excess of $ i 25 million.
As of September 30, 2023 and December 31, 2022, the aggregate value of Northstar Manager’s ownership interest in Northstar Spectrum and SNR Management’s ownership interest in SNR HoldCo was $ i 529 million and $ i 464 million, respectively, recorded as “Redeemable noncontrolling interests” on our Condensed Consolidated Balance Sheets. Subsequently, the FCC consented to the sale of Northstar Manager’s ownership interests in Northstar Spectrum, which we purchased for a total of approximately $ i 109 million on October 12, 2023. This purchase resulted in the elimination of all of our redeemable noncontrolling interest as it related to Northstar Spectrum as of the purchase date and we continue to consolidate the Northstar Entities as wholly-owned subsidiaries.
The AWS-3 Licenses are subject to certain interim and final build-out requirements, as well as certain renewal requirements. The SNR Entities may need to raise significant additional capital in the future, which may be obtained from third-party sources or from us, so that the SNR Entities may commercialize, build-out and integrate these AWS-3 Licenses, comply with regulations applicable to such AWS-3 Licenses, and make any potential SNR Re-Auction Payment for the AWS-3 licenses retained by the FCC. Depending upon the nature and scope of such commercialization, build-out and integration efforts, regulatory compliance, and potential SNR Re-Auction Payment, any loans, equity contributions or partnerships could vary significantly. There can be no assurance that we will be able to obtain a profitable return on our noncontrolling investment in the SNR Entities.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Contingencies
Separation Agreement
On January 1, 2008, we completed the distribution of our technology and set-top box business and certain infrastructure assets (the “Spin-off”) into a separate publicly-traded company, EchoStar. In connection with the Spin-off, we entered into a separation agreement with EchoStar that provides, among other things, for the division of certain liabilities, including liabilities resulting from litigation. Under the terms of the separation agreement, EchoStar has assumed certain liabilities that relate to its business, including certain designated liabilities for acts or omissions that occurred prior to the Spin-off. Certain specific provisions govern intellectual property related claims under which, generally, EchoStar will only be liable for its acts or omissions following the Spin-off and we will indemnify EchoStar for any liabilities or damages resulting from intellectual property claims relating to the period prior to the Spin-off, as well as our acts or omissions following the Spin-off.
On February 28, 2017, we and EchoStar and certain of our respective subsidiaries completed the transactions contemplated by the Share Exchange Agreement (the “Share Exchange Agreement”) that was previously entered into on January 31, 2017 (the “Share Exchange”), pursuant to which certain assets that were transferred to EchoStar in the Spin-off were transferred back to us. On September 10, 2019, we and EchoStar and certain of our respective subsidiaries completed the transactions contemplated by the Master Transaction Agreement (the “Master Transaction Agreement”) that was previously entered into on May 19, 2019, pursuant to which certain assets that were transferred to EchoStar in the Spin-off were transferred back to us. The Share Exchange Agreement and the Master Transaction Agreement contain additional indemnification provisions between us and EchoStar for certain liabilities and legal proceedings.
Litigation
We are involved in a number of legal proceedings (including those described below) concerning matters arising in connection with the conduct of our business activities. Many of these proceedings are at preliminary stages, and many of these proceedings seek an indeterminate amount of damages. We regularly evaluate the status of the legal proceedings in which we are involved to assess whether a loss is probable or there is a reasonable possibility that a loss or an additional loss may have been incurred and to determine if accruals are appropriate. If accruals are not appropriate, we further evaluate each legal proceeding to assess whether an estimate of the possible loss or range of possible loss can be made.
For certain cases described on the following pages, management is unable to provide a meaningful estimate of the possible loss or range of possible loss because, among other reasons: (i) the proceedings are in various stages; (ii) damages have not been sought; (iii) damages are unsupported and/or exaggerated; (iv) there is uncertainty as to the outcome of pending appeals or motions; (v) there are significant factual issues to be resolved; and/or (vi) there are novel legal issues or unsettled legal theories to be presented or a large number of parties. For these cases, however, management does not believe, based on currently available information, that the outcomes of these proceedings will have a material adverse effect on our financial condition, though the outcomes could be material to our operating results for any particular period, depending, in part, upon the operating results for such period.
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ClearPlay, Inc.
On March 13, 2014, ClearPlay, Inc. (“ClearPlay”) filed a complaint against us, our wholly-owned subsidiary DISH Network L.L.C., EchoStar, and its then wholly-owned subsidiary EchoStar Technologies L.L.C., in the United States District Court for the District of Utah. The complaint alleges willful infringement of United States Patent Nos. 6,898,799 (the “799 patent”), entitled “Multimedia Content Navigation and Playback”; 7,526,784 (the “784 patent”), entitled “Delivery of Navigation Data for Playback of Audio and Video Content”; 7,543,318 (the “318 patent”), entitled “Delivery of Navigation Data for Playback of Audio and Video Content”; 7,577,970 (the “970 patent”), entitled “Multimedia Content Navigation and Playback”; and 8,117,282 (the “282 patent”), entitled “Media Player Configured to Receive Playback Filters From Alternative Storage Mediums.” ClearPlay alleges that the AutoHop™ feature of our Hopper® set-top box infringes the asserted patents. On February 11, 2015, the case was stayed pending various third-party challenges before the United States Patent and Trademark Office regarding the validity of certain of the patents asserted in the action.
In those third-party challenges, the United States Patent and Trademark Office found that all claims of the 282 patent are unpatentable, and that certain claims of the 784 patent and 318 patent are unpatentable. ClearPlay appealed as to the 784 patent and the 318 patent, and on August 23, 2016, the United States Court of Appeals for the Federal Circuit affirmed the findings of the United States Patent and Trademark Office. On October 31, 2016, the stay was lifted, and in May 2017, ClearPlay agreed to dismiss us and EchoStar as defendants, leaving DISH Network L.L.C. and DISH Technologies L.L.C. as the sole defendants.
On October 16, October 21, November 2, 2020 and November 9, 2020, DISH Network L.L.C. filed petitions with the United States Patent and Trademark Office requesting ex parte reexamination of the validity of the asserted claims of, respectively, the 784 patent, the 799 patent, the 318 patent and the 970 patent; and on November 2, November 20, December 14 and December 15, 2020, the United States Patent and Trademark Office granted each request for reexamination. On May 7, 2021, May 25, 2021, June 25, 2021 and July 7, 2021, the United States Patent and Trademark Office issued Ex Parte Reexamination Certificates confirming the patentability of the challenged claims of, respectively, the 799 patent, the 784 patent, the 318 patent and the 970 patent.
In October and November 2021, DISH Network L.L.C. filed petitions with the United States Patent and Trademark Office requesting ex parte reexamination of the validity of certain asserted claims of the 784 patent, the 799 patent and the 970 patent. In November and December, 2021, the United States Patent and Trademark Office granted review of the challenged claims of the 799 patent and the 970 patent, but denied review of the challenged claims of the 784 patent. In December 2021, DISH Network L.L.C. petitioned for review of the denial as to the 784 patent. On January 24, 2022, an examiner of the United States Patent and Trademark Office affirmed the challenged claims of the 799 patent, and on January 19, 2023, an examiner of the United States Patent and Trademark Office affirmed the challenged claims of the 970 patent.
In an order dated January 31, 2023, the Court granted in part and denied in part DISH Network L.L.C.’s and DISH Technologies L.L.C.’s motion for summary judgment. Thereafter, ClearPlay narrowed its case to three asserted claims: one under the 799 patent and two under the 970 patent. Following a two-week trial, on March 10, 2023, the jury returned a verdict that DISH Network L.L.C. and DISH Technologies L.L.C. infringed each of the asserted patent claims (though not willfully), and awarded damages of $ i 469 million. That verdict became moot on March 21, 2023, when the trial court indicated that it would grant DISH Network L.L.C.’s and DISH Technologies L.L.C.’s motion for judgment as a matter of law, thus effectively vacating the jury award. On June 2, 2023, the Court entered its formal order granting judgment as a matter of law.
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We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.
Data Breach Class Actions
On May 9, 2023, Susan Owen-Brooks, an alleged customer, filed a putative class action complaint against us in the United States District Court for the District of Colorado. She purports to represent a nationwide class of all individuals in the United States who allegedly had private information stolen as a result of the February 23, 2023 Cyber-security Incident (and a North Carolina statewide subclass of the same individuals). On behalf of the nationwide class, she alleges claims for contractual breaches, negligence and unjust enrichment (and, on behalf of the North Carolina subclass only, violation of the North Carolina Deceptive Trade Practices Act), and seeks monetary damages, injunctive relief and a declaratory judgment. Since that filing, i ten additional putative class action complaints have been filed in the United States District Court for the District of Colorado, purporting to represent the same nationwide class of people, and Owen-Brooks has filed an amended complaint. On August 2, 2023, the Court issued an order consolidating the first ten cases (the eleventh was dismissed).
We intend to vigorously defend this case. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.
Digital Broadcasting Solutions, LLC
On August 29, 2022, Digital Broadcasting Solutions, LLC filed a complaint against our wholly-owned subsidiaries DISH Network L.L.C. and DISH Technologies L.L.C. in the United States District Court for the Eastern District of Texas. The complaint alleges infringement of U.S. Patent No. 8,929,710 (the “710 patent”) and U.S. Patent No. 9,538,122 (the “122 patent”), each entitled “System and method for time shifting at least a portion of a video program.” Generally, the plaintiff contends that the AutoHop feature of our Hopper® set-top boxes infringes the asserted patents. On June 21, 2023, the Court granted the motion of DISH Network L.L.C. and DISH Technologies L.L.C. to have the case transferred to the United States District Court for the District of Colorado.
In May 2023, DISH Network L.L.C. and DISH Technologies L.L.C. filed petitions with the United States Patent and Trademark Office challenging the validity of all claims of the 710 patent and the 122 patent.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.
Entropic Communications, LLC (first action)
On March 9, 2022, Entropic Communications, LLC (“Entropic”) filed a complaint against us and our wholly-owned subsidiaries DISH Network L.L.C. and Dish Network Service L.L.C. in the United States District Court for the Eastern District of Texas. The complaint alleges infringement of U.S. Patent No. 7,130,576 (the “576 patent”), entitled “Signal Selector and Combiner for Broadband Content Distribution”; U.S. Patent No. 7,542,715 (the “715 Patent”), entitled “Signal Selector and Combiner for Broadband Content Distribution”; and U.S. Patent No. 8,792,008 (the “008 Patent”), entitled “Method and Apparatus for Spectrum Monitoring.” On March 30, 2022, Entropic filed an amended complaint alleging infringement of the same patents. Generally, the plaintiff accuses satellite antennas, low-noise block converters, signal selector and combiners, and set-top boxes and the manner in which they process signals for satellite television customers of infringing the asserted patents.
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On October 24, 2022, this case was ordered to be transferred to the United States District Court for the Central District of California. A companion case against DirecTV was also ordered transferred to the United States District Court for the Central District of California.
In January and February of 2023, DISH Network L.L.C. and Dish Network Service L.L.C. filed petitions with the United States Patent and Trademark Office challenging the validity of all claims of the 715 patent, all claims of the 008 patent, and 25 claims of the 576 patent, which includes all of its asserted claims. In August and September 2023, the Patent Office denied institution on the petitions challenging the 715 patent and the 576 patent. In September 2023, at the parties’ joint request, the Patent Office dismissed the petition challenging the 008 patent, as Entropic agreed to drop its claims against DISH Network on that patent.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages. The plaintiff is an entity that seeks to license a patent portfolio without itself practicing any of the claims recited therein.
Entropic Communications, LLC (second action)
On February 10, 2023, Entropic filed a second lawsuit against us and our wholly-owned subsidiaries DISH Network L.L.C., Dish Network Service L.L.C. and Dish Network California Service Corporation in the United States District Court for the Central District of California. The complaint alleges infringement of U.S. Patent No. 7,295,518 (the “518 patent”), entitled “Broadband network for coaxial cable using multi-carrier modulation”; U.S. Patent No. 7,594,249 (the “249 patent”), entitled “Network interface device and broadband local area network using coaxial cable”; U.S. Patent Nos. 7,889,759 (the “759 patent”), entitled “Broadband cable network utilizing common bit-loading”; U.S. Patent No. 8,085,802 (the “802 Patent”), entitled “Multimedia over coaxial cable access protocol”; U.S. Patent No. 9,838,213 (the “213 patent”), entitled “Parameterized quality of service architecture in a network”; U.S. Patent No. 10,432,422 (the “422 patent”), entitled “Parameterized quality of service architecture in a network”; U.S. Patent No. 8,631,450 (the “450 patent”), entitled “Broadband local area network”; U.S. Patent No. 8,621,539 (the “539 patent”), entitled “Physical layer transmitter for use in a broadband local area network”; U.S. Patent No. 8,320,566 (the “0,566 patent”), entitled “Method and apparatus for performing constellation scrambling in a multimedia home network”; U.S. Patent No. 10,257,566 (the “7,566 patent”), entitled “Broadband local area network”; U.S. Patent No. 8,228,910 (the “910 Patent”), entitled “Aggregating network packets for transmission to a destination mode”; and U.S. Patent No. 8,363,681 (the “681 patent”), entitled “Method and apparatus for using ranging measurements in a multimedia home network.” Generally, the patents relate to Multimedia over Coax Alliance standards and the manner in which we provide a whole-home DVR network over an on-premises coaxial cable network. Entropic has asserted the same patents in the same court against Comcast, Cox and DirecTV. On September 7, 2023, the Court granted the motion of DISH Network L.L.C., Dish Network Service L.L.C. and Dish Network California Service Corporation to dismiss the claims arising from the 7,566 patent and the 910 patent on the grounds that they claimed in eligible subject matter.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.
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Freedom Patents
On April 7, 2023, Freedom Patents LLC filed a complaint against us and our wholly-owned subsidiaries DISH Network L.L.C. and Dish Network Service L.L.C. in the United States District Court for the Eastern District of Texas. The complaint alleges infringement of U.S. Patent No. 8,284,686 (the “686 Patent”), entitled “Antenna/Beam Selection Training in MIMO Wireless LANS with Different Sounding Frames”; U.S. Patent No. 8,374,096 (the “096 Patent”), entitled “Method for Selecting Antennas and Beams in MIMO Wireless LANs”; and U.S. Patent No. 8,514,815 (the “815 Patent”), entitled “Training Signals for Selecting Antennas and Beams in MIMO Wireless LANs.” Similar complaints were also filed against Acer, Altice, Charter, Comcast and Verizon. In general, the asserted patents relate to the 802.11 wireless standard, and the products accused of infringement are the Wireless Joey, its access point, and certain Ring, Nest and Linksys products that we sell.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages. The plaintiff is an entity that seeks to license a patent portfolio without itself practicing any of the claims recited therein.
Jaramillo Securities Class Action
On March 23, 2023, a securities fraud class action complaint was filed against us and Messrs. Ergen, Carlson and Orban in the United States District Court for the District of Colorado. The complaint is brought on behalf of a putative class of purchasers of our securities during the February 22, 2021 to February 27, 2023 class period. In general, the complaint alleges that DISH Network’s public statements during that period were false and misleading and contained material omissions, because they did not disclose that we allegedly maintained a deficient cyber-security and information technology infrastructure, were unable to properly secure customer data and our operations were susceptible to widespread service outages.
In August 2023, the Court appointed a new lead plaintiff and lead plaintiff’s counsel, and, on October 20, 2023, they filed an amended complaint that abandoned the original allegations. In their amended complaint, plaintiffs allege that, during the class period, the defendants concealed problems concerning the 5G network buildout that prevented scaling and commercializing the network to obtain enterprise customers. The amended complaint adds as individual defendants James S. Allen, our Senior Vice President and Chief Accounting Officer; John Swieringa, our President, Technology and Chief Operating Officer; Dave Mayo, our former Executive Vice President of Network Development; Marc Rouanne, our Executive Vice President and Chief Network Officer; and Stephen Bye, our former Executive Vice President and Chief Commercial Officer.
We intend to vigorously defend this case. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.
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Jones 401(k) Litigation
On December 20, 2021, four former employees filed a class action complaint in the United States District Court for the District of Colorado against us, our Board of Directors, and our Retirement Plan Committee alleging fiduciary breaches arising from the management of our 401(k) Plan. The putative class, comprised of all participants in the Plan on or after January 20, 2016, alleges that the Plan had excessive recordkeeping and administrative expenses and that it maintained underperforming funds. On February 1, 2023, a Magistrate Judge issued a recommendation that the defendants’ motion to dismiss the complaint be granted, and on March 27, 2023, the district court judge granted the motion. As permitted by the Court’s order, the plaintiffs filed an amended complaint on April 10, 2023, which is limited to allegations regarding the alleged underperformance of the Fidelity Freedom Funds.
We intend to vigorously defend this case. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.
Realtime Data LLC and Realtime Adaptive Streaming LLC
On June 6, 2017, Realtime Data LLC d/b/a IXO (“Realtime”) filed an amended complaint in the United States District Court for the Eastern District of Texas (the “Original Texas Action”) against us; our wholly-owned subsidiaries DISH Network L.L.C., DISH Technologies L.L.C. (then known as EchoStar Technologies L.L.C.), Sling TV L.L.C. and Sling Media L.L.C.; EchoStar, and EchoStar’s wholly-owned subsidiary Hughes Network Systems, L.L.C. (“HNS”); and Arris Group, Inc. Realtime’s initial complaint in the Original Texas Action, filed on February 14, 2017, had named only EchoStar and HNS as defendants.
The amended complaint in the Original Texas Action alleges infringement of United States Patent No. 8,717,204 (the “204 patent”), entitled “Methods for encoding and decoding data”; United States Patent No. 9,054,728 (the “728 patent”), entitled “Data compression systems and methods”; United States Patent No. 7,358,867 (the “867 patent”), entitled “Content independent data compression method and system”; United States Patent No. 8,502,707 (the “707 patent”), entitled “Data compression systems and methods”; United States Patent No. 8,275,897 (the “897 patent”), entitled “System and methods for accelerated data storage and retrieval”; United States Patent No. 8,867,610 (the “610 patent”), entitled “System and methods for video and audio data distribution”; United States Patent No. 8,934,535 (the “535 patent”), entitled “Systems and methods for video and audio data storage and distribution”; and United States Patent No. 8,553,759 (the “759 patent”), entitled “Bandwidth sensitive data compression and decompression.” Realtime alleges that our, Sling TV L.L.C., Sling Media L.L.C. and Arris Group, Inc.’s streaming video products and services compliant with various versions of the H.264 video compression standard infringe the 897 patent, the 610 patent and the 535 patent, and that the data compression system in Hughes’ products and services infringes the 204 patent, the 728 patent, the 867 patent, the 707 patent and the 759 patent.
On July 19, 2017, the Court severed Realtime’s claims against us, DISH Network L.L.C., Sling TV L.L.C., Sling Media L.L.C. and Arris Group, Inc. (alleging infringement of the 897 patent, the 610 patent and the 535 patent) from the Original Texas Action into a separate action in the United States District Court for the Eastern District of Texas (the “Second Texas Action”). On August 31, 2017, Realtime dismissed the claims against us, Sling TV L.L.C., Sling Media Inc., and Sling Media L.L.C. from the Second Texas Action and refiled these claims (alleging infringement of the 897 patent, the 610 patent and the 535 patent) against Sling TV L.L.C., Sling Media Inc., and Sling Media L.L.C. in a new action in the United States District Court for the District of Colorado (the “Colorado Action”). Also on August 31, 2017, Realtime dismissed DISH Technologies L.L.C. from the Original Texas Action, and on September 12, 2017, added it as a defendant in an amended complaint in the Second Texas Action. On November 6, 2017, Realtime filed a joint motion to dismiss the Second Texas Action without prejudice, which the Court entered on November 8, 2017.
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On October 10, 2017, Realtime Adaptive Streaming LLC (“Realtime Adaptive Streaming”) filed suit against our wholly-owned subsidiaries DISH Network L.L.C. and DISH Technologies L.L.C., as well as Arris Group, Inc., in a new action in the United States District Court for the Eastern District of Texas (the “Third Texas Action”), alleging infringement of the 610 patent and the 535 patent. Also on October 10, 2017, an amended complaint was filed in the Colorado Action, substituting Realtime Adaptive Streaming as the plaintiff instead of Realtime, and alleging infringement of only the 610 patent and the 535 patent, but not the 897 patent. On November 6, 2017, Realtime Adaptive Streaming filed a joint motion to dismiss the Third Texas Action without prejudice, which the court entered on November 8, 2017. Also on November 6, 2017, Realtime Adaptive Streaming filed a second amended complaint in the Colorado Action, adding our wholly-owned subsidiaries DISH Network L.L.C. and DISH Technologies L.L.C., as well as Arris Group, Inc., as defendants.
As a result, neither we nor any of our subsidiaries is a defendant in the Original Texas Action; the Court has dismissed without prejudice the Second Texas Action and the Third Texas Action; and our wholly-owned subsidiaries DISH Network L.L.C., DISH Technologies L.L.C., Sling TV L.L.C. and Sling Media L.L.C. as well as Arris Group, Inc., are defendants in the Colorado Action, which now has Realtime Adaptive Streaming as the named plaintiff. Following a settlement with the plaintiff, Arris Group, Inc. was dismissed from the action on March 10, 2021.
On July 3, 2018, Sling TV L.L.C., Sling Media L.L.C., DISH Network L.L.C., and DISH Technologies L.L.C. filed petitions with the United States Patent and Trademark Office challenging the validity of each of the asserted patents. On January 31, 2019, the United States Patent and Trademark Office agreed to institute proceedings on our petitions, and it held trial on the petitions on December 5, 2019. On January 17, 2020, the United States Patent and Trademark Office terminated the petitions as time-barred, but issued a final written decision invalidating the 535 patent to third parties that had timely joined in our petition (and, on January 10, 2020, issued a final written decision invalidating the 535 patent in connection with a third party’s independent petition). On March 16, 2020, Sling TV L.L.C., Sling Media L.L.C., DISH Network L.L.C., and DISH Technologies L.L.C. filed a notice of appeal from the terminated petitions to the United States Court of Appeals for the Federal Circuit. On June 29, 2020, the United States Patent and Trademark Office filed a notice of intervention in the appeal. On March 16, 2021, the Court of Appeals dismissed the appeal for lack of jurisdiction. On April 29, 2021, Sling TV L.L.C., Sling Media L.L.C., DISH Network L.L.C., and DISH Technologies L.L.C. filed a petition for rehearing, which was denied on June 28, 2021. On January 12, 2021, Realtime Adaptive Streaming filed a notice of dismissal of its claims on the 535 patent.
On July 30, 2021, the District Court granted summary judgment in favor of DISH Network L.L.C., DISH Technologies L.L.C., Sling TV L.L.C. and Sling Media L.L.C., holding that the remaining asserted patent, the 610 patent, is invalid because it claims patent-ineligible abstract subject matter. Realtime Adaptive Streaming appealed that ruling to the United States Court of Appeals for the Federal Circuit, and on May 11, 2023, that Court affirmed the District Court’s summary judgment order. Independently, on September 21, 2021, in connection with an ex parte reexamination of the validity of the 610 patent, an examiner at the United States Patent and Trademark Office issued a final office action rejecting each asserted claim of the 610 patent as invalid over the cited prior art. On April 19, 2023, the Patent Trial and Appeal Board rejected Realtime Adaptive Streaming’s appeal and affirmed the examiner’s rejection of the asserted claims of the 610 patent. Realtime did not further appeal the Patent Trial and Appeal Board’s determination and, thus, the asserted claims of the 610 patent will be canceled. As a result, DISH Network L.L.C., DISH Technologies L.L.C., Sling TV L.L.C. and Sling Media L.L.C. no longer face any possible exposure from this matter, and the liability phase of this case is concluded.
On January 21, 2022, the District Court granted the motion by DISH Network L.L.C., DISH Technologies L.L.C., Sling TV L.L.C. and Sling Media L.L.C. to have the case declared “exceptional,” and on September 20, 2022, awarded them $ i 3.9 million in attorneys’ fees. Realtime Adaptive Streaming filed a notice of appeal to the United States Court of Appeals for the Federal Circuit from the exceptionality and fee award orders, and that appeal is now fully briefed.
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SafeCast Limited
On June 27, 2022, SafeCast Limited filed a complaint against us in the United States District Court for the Western District of Texas. The complaint alleges that we infringe U.S. Patent No. 9,392,302, entitled “System for providing improved facilities in time-shifted broadcasts” (the “302 patent”). On the same day, it brought complaints in the same court asserting infringement of the same patent against AT&T, Google, HBO, NBCUniversal, Paramount and Verizon. On October 24, 2022, in response to the parties’ joint motion, the Court ordered the case against us transferred to the United States District Court for the District of Colorado. On December 1, 2022, SafeCast filed an amended complaint naming DISH Network L.L.C. and DISH Technologies L.L.C. as defendants and withdrawing the allegations as to us. On June 22, 2023, DISH Network L.L.C. and DISH Technologies L.L.C. filed a petition with the United States Patent and Trademark Office challenging the validity of the asserted claims of the 302 patent. On August 28, 2023, the Court granted our motion to stay the case pending resolution of the petition.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the asserted patent, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages. The plaintiff is an entity that seeks to license a patent portfolio without itself practicing any of the claims recited therein.
Sound View Innovations, LLC
On December 30, 2019, Sound View Innovations, LLC filed one complaint against our wholly-owned subsidiaries DISH Network L.L.C. and DISH Technologies L.L.C. and a second complaint against our wholly-owned subsidiary Sling TV L.L.C. in the United States District Court for the District of Colorado. The complaint against DISH Network L.L.C. and DISH Technologies L.L.C. alleges infringement of United States Patent No 6,502,133 (the “133 patent”), entitled “Real-Time Event Processing System with Analysis Engine Using Recovery Information” and both complaints allege infringement of United States Patent No. 6,708,213 (the “213 patent), entitled “Method for Streaming Multimedia Information Over Public Networks”; United States Patent No. 6,757,796 (the “796 patent”), entitled “Method and System for Caching Streaming Live Broadcasts transmitted Over a Network”; and United States Patent No. 6,725,456 (the “456 patent”), entitled “Methods and Apparatus for Ensuring Quality of Service in an Operating System.” All but the 133 patent are also asserted in the complaint against Sling TV L.L.C.
On May 21, 2020, June 3, 2020, June 5, 2020 and July 10, 2020, DISH Network L.L.C., DISH Technologies L.L.C. and Sling TV L.L.C. filed petitions with the United States Patent and Trademark Office challenging the validity of, respectively, the 213 patent, the 133 patent, the 456 patent and the 796 patent. On November 25, 2020, the United States Patent and Trademark Office declined to review the validity of the 213 patent, and on September 29, 2021, denied a request for rehearing of that decision. On January 19, 2021, the United States Patent and Trademark Office agreed to institute proceedings on the 456 patent but declined to review the 133 patent. On February 24, 2021, the United States Patent and Trademark Office agreed to institute proceedings on the 796 patent. On January 18, 2022, the United States Patent and Trademark Office issued a final written decision holding that the challenged claim of the 456 patent is patentable, and on February 8, 2022, it issued a final written decision holding that the challenged claims of the 796 patent are patentable.
On March 22, 2022, DISH Network L.L.C., DISH Technologies L.L.C. and Sling TV L.L.C. filed a notice of appeal to the United States Court of Appeals for the Federal Circuit from the adverse final written decision regarding the 456 patent, and on April 8, 2022, they filed a notice of appeal to the same court from the adverse final written decision regarding the 796 patent. The appeal on the 456 patent was voluntarily dismissed on December 6, 2022. The Federal Circuit heard oral argument on the 796 patent appeal on October 3, 2023, and affirmed the United States Patent and Trademark Office’s adverse final written decision on October 5, 2023.
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On April 20, 2022, DISH Network L.L.C., DISH Technologies L.L.C. and Sling TV L.L.C. filed a petition with the United States Patent and Trademark Office requesting ex parte reexamination of the validity of one of the asserted claims of the 213 patent, and reexamination was ordered on June 16, 2022. On January 18, 2023, they filed another petition requesting ex parte reexamination of the validity of the four additional asserted claims of the 213 patent, and reexamination was ordered on April 17, 2023.
We intend to vigorously defend these cases. In the event that a court ultimately determines that we infringe the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages. The plaintiff is an entity that seeks to license a patent portfolio without itself practicing any of the claims recited therein.
State of Illinois ex rel. Rodriguez
In March 2020, two private “relators” filed this case in the Circuit Court of Cook County Illinois, County Department, Law Division, under the Illinois False Claims Act against DISH Wireless, Sprint and more than 60 Boost Mobile retailers in Illinois. The defendants only became aware of the lawsuit after it was unsealed in March 2022. The operative Second Amended Complaint alleges that the retailer defendants should have collected sales tax under the Retailers’ Occupation Tax Act on any amounts that Sprint or DISH Network rebated them to facilitate handset price discounts to Illinois consumers (“Prepaid Phone Rebates”) and on any phone activation fees the retailers charged to customers (“Device Setup Charges”). It further alleges that DISH Wireless and Sprint are liable for the alleged violations arising from the Device Setup Charges because of the way they allegedly managed the point-of-sale system that the retailer defendants used. The Plaintiffs seek to recover triple the amount of allegedly unpaid taxes, fines for each alleged violation, and attorneys’ fees and costs. On June 13, 2023, the Court denied the defendants’ motions to dismiss the complaint.
We intend to vigorously defend this case. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.
TQ Delta, LLC
On July 17, 2015, TQ Delta, LLC (“TQ Delta”) filed a complaint against us and our wholly-owned subsidiaries DISH DBS Corporation and DISH Network L.L.C. in the United States District Court for the District of Delaware. The Complaint alleges infringement of United States Patent No. 6,961,369 (the “369 patent”), which is entitled “System and Method for Scrambling the Phase of the Carriers in a Multicarrier Communications System”; United States Patent No. 8,718,158 (the “158 patent”), which is entitled “System and Method for Scrambling the Phase of the Carriers in a Multicarrier Communications System”; United States Patent No. 9,014,243 (the “243 patent”), which is entitled “System and Method for Scrambling Using a Bit Scrambler and a Phase Scrambler”; United States Patent No.7,835,430 (the “430 patent”), which is entitled “Multicarrier Modulation Messaging for Frequency Domain Received Idle Channel Noise Information”; United States Patent No. 8,238,412 (the “412 patent”), which is entitled “Multicarrier Modulation Messaging for Power Level per Subchannel Information”; United States Patent No. 8,432,956 (the “956 patent”), which is entitled “Multicarrier Modulation Messaging for Power Level per Subchannel Information”; and United States Patent No. 8,611,404 (the “404 patent”), which is entitled “Multicarrier Transmission System with Low Power Sleep Mode and Rapid-On Capability.”
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(Unaudited)
On September 9, 2015, TQ Delta filed a first amended complaint that added allegations of infringement of United States Patent No. 9,094,268 (the “268 patent”), which is entitled “Multicarrier Transmission System With Low Power Sleep Mode and Rapid-On Capability.” On May 16, 2016, TQ Delta filed a second amended complaint that added EchoStar Corporation and its then wholly-owned subsidiary EchoStar Technologies L.L.C. as defendants. TQ Delta alleges that our satellite TV service, Internet service, set-top boxes, gateways, routers, modems, adapters and networks that operate in accordance with one or more Multimedia over Coax Alliance Standards infringe the asserted patents.
TQ Delta has filed actions in the same court alleging infringement of the same patents against Comcast Corp., Cox Communications, Inc., DirecTV, Time Warner Cable Inc. and Verizon Communications, Inc. TQ Delta is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.
On July 14, 2016, TQ Delta stipulated to dismiss with prejudice all claims related to the 369 patent and the 956 patent. On July 20, 2016, we filed petitions with the United States Patent and Trademark Office challenging the validity of all of the patent claims of the 404 patent and the 268 patent that have been asserted against us. Third parties filed petitions with the United States Patent and Trademark Office challenging the validity of all of the patent claims that have been asserted against us in the action. On November 4, 2016, the United States Patent and Trademark Office agreed to institute proceedings on the third-party petitions related to the 158 patent, the 243 patent, the 412 patent and the 430 patent.
On December 20, 2016, pursuant to a stipulation of the parties, the Court stayed the case until the resolution of all petitions to the United States Patent and Trademark Office challenging the validity of all of the patent claims at issue. On January 19, 2017, the United States Patent and Trademark Office granted our motions to join the instituted petitions on the 430 and 158 patents.
On February 9, 2017, the United States Patent and Trademark Office agreed to institute proceedings on our petition related to the 404 patent, and on February 13, 2017, the United States Patent and Trademark Office agreed to institute proceedings on our petition related to the 268 patent. On February 27, 2017, the United States Patent and Trademark Office granted our motions to join the instituted petitions on the 243 and 412 patents. On October 26, 2017, the United States Patent and Trademark Office issued final written decisions on the petitions challenging the 158 patent, the 243 patent, the 412 patent and the 430 patent, and it invalidated all of the asserted claims of those patents.
On February 7, 2018, the United States Patent and Trademark Office issued final written decisions on the petitions challenging the 404 patent, and it invalidated all of the asserted claims of that patent on the basis of our petition. On February 10, 2018, the United States Patent and Trademark Office issued a final written decision on our petition challenging the 268 patent, and it invalidated all of the asserted claims.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
On March 12, 2018, the United States Patent and Trademark Office issued a final written decision on a third-party petition challenging the 268 patent, and it invalidated all of the asserted claims. All asserted claims have now been invalidated by the United States Patent and Trademark Office. TQ Delta filed notices of appeal from the final written decisions adverse to it. On May 9, 2019, the United States Court of Appeals for the Federal Circuit affirmed the invalidity of the 430 patent and the 412 patent. On July 10, 2019, the United States Court of Appeals for the Federal Circuit affirmed the invalidity of the asserted claims of the 404 patent. On July 15, 2019, the United States Court of Appeals for the Federal Circuit affirmed the invalidity of the asserted claims of the 268 patent. On November 22, 2019, the United States Court of Appeals for the Federal Circuit reversed the invalidity finding on the 243 patent and the 158 patent, and then, on March 29, 2020, denied a petition for panel rehearing as to those findings. On April 13, 2021, the Court lifted the stay, and the case is proceeding on the 243 patent and the 158 patent. On April 23 and April 26, 2021, the United States Patent and Trademark Office issued orders granting requests for ex parte reexamination of, respectively, the 243 patent and the 158 patent, but on July 27, 2023, the United States Patent and Trademark Office confirmed the challenged claims of the 243 patent. In a proposed supplemental report, TQ Delta’s damages expert contends that TQ Delta is entitled to $ i 251 million in damages.
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages.
Uniloc 2017 LLC
On January 31, 2019, Uniloc 2017 LLC (“Uniloc”) filed a complaint against our wholly-owned subsidiary Sling TV L.L.C. in the United States District Court for the District of Colorado. The Complaint alleges infringement of United States Patent No. 6,519,005 (the “005 patent”), which is entitled “Method of Concurrent Multiple-Mode Motion Estimation for Digital Video”; United States Patent No. 6,895,118 (the “118 patent”), which is entitled “Method of Coding Digital Image Based on Error Concealment”; United States Patent No. 9,721,273 (the “273 patent”), which is entitled “System and Method for Aggregating and Providing Audio and Visual Presentations Via a Computer Network”); and United States Patent No. 8,407,609 (the “609 patent”), which is entitled “System and Method for Providing and Tracking the Provision of Audio and Visual Presentations Via a Computer Network.”
On June 25, 2019, Sling TV L.L.C. filed a petition with the United States Patent and Trademark Office challenging the validity of all of the asserted claims of the 005 patent. On July 19, 2019 and July 22, 2019, respectively, Sling TV L.L.C. filed petitions with the United States Patent and Trademark Office challenging the validity of all asserted claims of the 273 patent and the 609 patent. On August 12, 2019, Sling TV L.L.C. filed a petition with the United States Patent and Trademark Office challenging the validity of all of the asserted claims of the 118 patent. On October 18, 2019, pursuant to a stipulation of the parties, the Court entered a stay of the trial proceedings.
On January 9, 2020, the United States Patent and Trademark Office agreed to institute proceedings on the petition challenging the 005 patent. On January 15, 2020, the United States Patent and Trademark Office agreed to institute proceedings on the petition challenging the 273 patent. On February 4, 2020, the United States Patent and Trademark Office agreed to institute proceedings on the petition challenging the 609 patent. On February 25, 2020, the United States Patent and Trademark Office declined to institute proceedings on the petition challenging the 118 patent.
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(Unaudited)
On December 28, 2020, the United States Patent and Trademark Office issued a final written decision upholding the validity of the challenged claims of the 273 patent. Sling TV L.L.C. appealed that decision to the United States Court of Appeals for the Federal Circuit, and on February 2, 2022, the Federal Circuit vacated the final written decision and remanded to the United States Patent and Trademark Office to reconsider its ruling. On remand, on September 7, 2022, the United States Patent and Trademark Office issued a revised final written decision finding all challenged claims of the 273 patent invalid. On November 9, 2022, Uniloc filed a notice of appeal of that revised final written decision, and briefing was completed on August 11, 2023.
On January 5, 2021, the United States Patent and Trademark Office issued a final written decision invalidating all challenged claims of the 005 patent. On January 19, 2021, the United States Patent and Trademark Office issued a final written decision invalidating all challenged claims of the 609 patent (and a second final written decision invalidating all challenged claims of the 609 patent based on a third party’s petition).
We intend to vigorously defend this case. In the event that a court ultimately determines that we infringe the asserted patents, we may be subject to substantial damages, which may include treble damages, and/or an injunction that could require us to materially modify certain features that we currently offer to consumers. We cannot predict with any degree of certainty the outcome of the suit or determine the extent of any potential liability or damages. Uniloc is an entity that seeks to license an acquired patent portfolio without itself practicing any of the claims recited therein.
Vermont National Telephone Company
On September 23, 2016, the United States District Court for the District of Columbia unsealed a qui tam complaint that, on May 13, 2015, Vermont National filed against us; our wholly-owned subsidiaries, American AWS-3 Wireless I L.L.C., American II, American III, and DISH Wireless Holding L.L.C.; Charles W. Ergen (our Chairman) and Cantey M. Ergen (a member of our Board of Directors); Northstar Wireless; Northstar Spectrum; Northstar Manager; SNR Wireless; SNR HoldCo; SNR Management; and certain other parties. The complaint alleges violations of the federal civil False Claims Act (the “FCA”) based on, among other things, allegations that Northstar Wireless and SNR Wireless falsely claimed bidding credits of i 25% in the AWS-3 Auction when they were allegedly under the de facto control of DISH Network and, therefore, were not entitled to the bidding credits as designated entities under applicable FCC rules. Vermont National participated in the AWS-3 Auction through its wholly-owned subsidiary, VTel Wireless. The complaint was unsealed after the United States Department of Justice notified the District Court that it had declined to intervene in the action. Vermont National seeks to recover on behalf of the United States government approximately $ i 10 billion, which reflects the $ i 3.3 billion in bidding credits that Northstar Wireless and SNR Wireless claimed in the AWS-3 Auction, trebled under the FCA. Vermont National also seeks civil penalties of not less than $ i 5,500 and not more than $ i 11,000 for each violation of the FCA. On March 2, 2017, the United States District Court for the District of Columbia entered a stay of the litigation until such time as the United States Court of Appeals for the District of Columbia (the “D.C. Circuit”) issued its opinion in SNR Wireless LicenseCo, LLC, et al. v. F.C.C. The D.C. Circuit issued its opinion on August 29, 2017 and remanded the matter to the FCC for further proceedings. See “Commitments – DISH Network Noncontrolling Investments in the Northstar Entities and the SNR Entities Related to AWS-3 Wireless Spectrum Licenses” above for further information.
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(Unaudited)
Thereafter, the District Court maintained the stay until October 26, 2018. On February 11, 2019, the District Court granted Vermont National’s unopposed motion for leave to file an amended complaint. On March 28, 2019, the defendants filed a motion to dismiss Vermont National’s amended complaint, and on March 23, 2021, the District Court granted the motion to dismiss. On April 21, 2021, Vermont National filed a notice of appeal to the United States Court of Appeals for the DC Circuit and, on May 17, 2022, that court reversed the District Court’s dismissal of the complaint. On June 16, 2022, the Defendants-Appellees filed a petition for rehearing or rehearing en banc, but on August 17, 2022, that petition was denied. On August 25, 2023, the FCC provided a sworn declaration stating that “the FCC considers … SNR and Northstar to have fully and timely satisfied their obligations to pay money to the Government arising from the AWS-3 Auction.” On that basis, on September 22, 2023, the Defendants filed a motion seeking partial summary judgment of no damages. On September 26, 2023, the Court denied the motion as premature.
We intend to vigorously defend this case. We cannot predict with any degree of certainty the outcome of this proceeding or determine the extent of any potential liability or damages.
Other
In addition to the above actions, we are subject to various other legal proceedings and claims that arise in the ordinary course of business, including, among other things, disputes with programmers regarding fees. In our opinion, the amount of ultimate liability with respect to any of these actions is unlikely to materially affect our financial condition, results of operations or liquidity, though the outcomes could be material to our operating results for any particular period, depending, in part, upon the operating results for such period.
i11.Segment Reporting
Operating segments are components of an enterprise for which separate financial information is available and regularly evaluated by the chief operating decision maker(s) of an enterprise. Operating income is the primary measure used by our chief operating decision maker to evaluate segment operating performance. We currently operate i two primary business segments: (1) Pay-TV; and (2) Wireless. See Note 1 for further information.
All other and eliminations primarily include intersegment eliminations related to intercompany debt and the related interest income and interest expense, which are eliminated in consolidation.
The total assets, revenue and operating income, and purchases of property and equipment (including capitalized interest related to FCC authorizations) by segment were as follows:
i
| | | | | | | |
| | As of | | ||||
| | September 30, | | | |||
| | 2023 |
| 2022 |
| ||
| | (In thousands) | | ||||
Total assets: | | | | | | | |
Pay-TV | | $ | i 48,722,185 | | $ | i 46,295,495 | |
Wireless (1) | | | i 49,142,869 | | | i 46,261,004 | |
Eliminations (1) | | | ( i 44,120,380) | | | ( i 39,949,937) | |
Total assets | | $ | i 53,744,674 | | $ | i 52,606,562 | |
| | | | | | | |
| (1) | The increase primarily resulted from intercompany advances for capital expenditures related to our 5G Network Deployment. |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
| | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | | ||||||||
| | September 30, | | | |||||||||
| | 2023 |
| 2022 |
| 2023 |
| 2022 |
| ||||
| | (In thousands) | | ||||||||||
Revenue: | | | | | | | | | | | | | |
Pay-TV | | $ | i 2,807,101 | | $ | i 3,078,418 | | $ | i 8,754,372 | | $ | i 9,399,244 | |
Wireless | | | i 900,302 | | | i 1,018,132 | | | i 2,824,550 | | | i 3,241,590 | |
Eliminations | | | ( i 2,887) | | | ( i 1,099) | | | ( i 5,847) | | | ( i 4,800) | |
Total revenue | | $ | i 3,704,516 | | $ | i 4,095,451 | | $ | i 11,573,075 | | $ | i 12,636,034 | |
| | | | | | | | | | | | | |
Operating income (loss): | | | | | | | | | | | | | |
Pay-TV | | $ | i 589,465 | | $ | i 647,654 | | $ | i 1,985,490 | | $ | i 2,185,171 | |
Wireless | | | ( i 631,271) | | | ( i 220,625) | | | ( i 1,497,539) | | | ( i 514,847) | |
Total operating income (loss) | | $ | ( i 41,806) | | $ | i 427,029 | | $ | i 487,951 | | $ | i 1,670,324 | |
| | | | | | | | | | | | | |
Purchases of property and equipment (including capitalized interest related to FCC authorizations): | | | | | | | | | | | | | |
Pay-TV | | $ | i 64,331 | | $ | i 28,103 | | $ | i 167,524 | | $ | i 91,358 | |
Wireless | | | i 852,169 | | | i 765,086 | | | i 2,907,102 | | | i 2,496,077 | |
Total purchases of property and equipment (including capitalized interest related to FCC authorizations) | | $ | i 916,500 | | $ | i 793,189 | | $ | i 3,074,626 | | $ | i 2,587,435 | |
| | | | | | | | | | | | | |
Geographic Information. Revenue is attributed to geographic regions based upon the location where the goods and services are provided. All service revenue was derived from the United States. Substantially all of our long-lived assets reside in the United States.
The following table summarizes revenue by geographic region:
i
| | | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | | | ||||||||
|
| September 30, | | September 30, | | | ||||||||
Revenue: | | 2023 |
| 2022 |
| 2023 |
| 2022 | | | ||||
| | (In thousands) | | | ||||||||||
United States | | $ | i 3,694,540 | | $ | i 4,082,463 | | $ | i 11,542,198 | | $ | i 12,603,549 | | |
Canada and Mexico | | | i 9,976 | | | i 12,988 | | | i 30,877 | | | i 32,485 | | |
Total revenue | | $ | i 3,704,516 | | $ | i 4,095,451 | | $ | i 11,573,075 | | $ | i 12,636,034 | | |
| | | | | | | | | | | | | | |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
The revenue from external customers disaggregated by major revenue source was as follows:
i
| | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | | ||||||||
| | September 30, | | September 30, | | ||||||||
Category: |
| 2023 |
| 2022 | | 2023 |
| 2022 | | ||||
| | (In thousands) | | ||||||||||
Pay-TV subscriber and related revenue | | $ | i 2,774,875 | | $ | i 3,037,279 | | $ | i 8,586,009 | | $ | i 9,280,621 | |
Wireless services and related revenue | | | i 814,267 | | | i 892,820 | | | i 2,535,296 | | | i 2,754,008 | |
Pay-TV equipment sales and other revenue | | | i 32,226 | | | i 41,139 | | | i 168,363 | | | i 118,623 | |
Wireless equipment sales and other revenue | | | i 86,035 | | | i 125,312 | | | i 289,254 | | | i 487,582 | |
Eliminations | | | ( i 2,887) | | | ( i 1,099) | | | ( i 5,847) | | | ( i 4,800) | |
Total | | $ | i 3,704,516 | | $ | i 4,095,451 | | $ | i 11,573,075 | | $ | i 12,636,034 | |
| | | | | | | | | | | | | |
/ i12.Contract Balances
Our valuation and qualifying accounts as of September 30, 2023 were as follows:
i
| | | | | | | | | | | | | |
Allowance for credit losses |
| Balance at |
| Current Period Provision for Expected Credit Losses |
| Write-offs Charged Against Allowance | | Balance at |
| ||||
| | (In thousands) | | ||||||||||
For the nine months ended September 30, 2023 | | $ | i 44,431 | | $ | i 54,655 | | $ | ( i 47,380) | | $ | i 51,706 | |
Contract liabilities arise when we bill our customers and receive consideration in advance of providing the service. Contract liabilities are recognized as revenue when the service has been provided to the customer. Contract liabilities are recorded in “Deferred revenue and other” and “Long-term deferred revenue and other long-term liabilities” on our Condensed Consolidated Balance Sheets.
i
| | | | | | | |
| | As of | | ||||
| | September 30, | | | |||
| | 2023 | | 2022 | | ||
| | (In thousands) | | ||||
Contract liabilities | | $ | i 617,244 | | $ | i 698,602 | |
| | | | | | | |
Our beginning of period contract liability recorded as customer contract revenue during 2023 was $ i 665 million.
We apply a practical expedient and do not disclose the value of the remaining performance obligations for contracts that are less than one year in duration, which represent a substantial majority of our revenue. As such, the amount of revenue related to unsatisfied performance obligations is not necessarily indicative of our future revenue.
/
i
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
13.Related Party Transactions
Related Party Transactions with EchoStar
Following the Spin-off, we and EchoStar have operated as separate publicly-traded companies and neither entity has any ownership interest in the other. However, a substantial majority of the voting power of the shares of both companies is owned beneficially by Charles W. Ergen, our Chairman, and by certain entities established by Mr. Ergen for the benefit of his family.
In connection with and following the Spin-off, we and EchoStar have entered into certain agreements pursuant to which we obtain certain products, services and rights from EchoStar, EchoStar obtains certain products, services and rights from us, and we and EchoStar have indemnified each other against certain liabilities arising from our respective businesses. Pursuant to the Share Exchange Agreement, among other things, EchoStar transferred to us certain assets and liabilities of the EchoStar technologies and EchoStar broadcasting businesses. Pursuant to the Master Transaction Agreement, among other things, EchoStar transferred to us certain assets and liabilities of its EchoStar Satellite Services segment.
In connection with the Share Exchange and the Master Transaction Agreement, we and EchoStar and certain of their subsidiaries entered into certain agreements covering, among other things, tax matters, employee matters, intellectual property matters and the provision of transitional services. In addition, certain agreements that we had with EchoStar have terminated, and we entered into certain new agreements with EchoStar. We also may enter into additional agreements with EchoStar in the future. The following is a summary of the terms of our principal agreements with EchoStar that may have an impact on our financial condition and results of operations.
“Trade accounts receivable”
As of September 30, 2023 and December 31, 2022, trade accounts receivable from EchoStar was $ i 2 million and $ i 1 million, respectively. These amounts are recorded in “Trade accounts receivable” on our Condensed Consolidated Balance Sheets.
“Trade accounts payable”
As of September 30, 2023 and December 31, 2022, trade accounts payable to EchoStar was $ i 7 million and $ i 4 million, respectively. These amounts are recorded in “Trade accounts payable” on our Condensed Consolidated Balance Sheets.
“Equipment sales and other revenue”
During the three months ended September 30, 2023 and 2022, we received $ i 3 million and $ i 1 million, respectively, for services provided to EchoStar. During the nine months ended September 30, 2023 and 2022, we received $ i 6 million and $ i 4 million, respectively, for services provided to EchoStar. These amounts are recorded in “Equipment sales and other revenue” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The agreements pertaining to these revenues are discussed below.
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(Unaudited)
Real Estate Lease Agreements. We have entered into lease agreements pursuant to which we lease certain real estate to EchoStar. The rent on a per square foot basis for each of the leases is comparable to per square foot rental rates of similar commercial property in the same geographic areas, and EchoStar is responsible for its portion of the taxes, insurance, utilities and maintenance of the premises. The term of each lease is set forth below:
| ● | El Paso Lease Agreement. During 2012, we began leasing certain space at 1285 Joe Battle Blvd., El Paso, Texas to EchoStar for an initial period ending on August 1, 2015, which also provides EchoStar with renewal options for i four consecutive i three-year terms. EchoStar exercised its renewal option for a period ending in July 2024. |
| ● | 90 Inverness Lease Agreement. In connection with the completion of the Share Exchange, effective March 1, 2017, EchoStar leases certain space from us at 90 Inverness Circle East, Englewood, Colorado with renewal options for i four consecutive i three-year terms. EchoStar exercised its renewal option for a period ending in February 2025. |
| ● | Cheyenne Lease Agreement. In connection with the completion of the Share Exchange, effective March 1, 2017, EchoStar began leasing certain space from us at 530 EchoStar Drive, Cheyenne, Wyoming for a period ending in February 2019. In August 2018, EchoStar exercised its option to renew this lease for a i one-year period ending in February 2020. EchoStar has the option to renew this lease for i 12 i one-year periods. In connection with the Master Transaction Agreement, we and EchoStar amended this lease to provide EchoStar with certain space for a period ending in September 2023, with the option for EchoStar to renew for a i one-year period upon i 180 days’ written notice prior to the end of the term. This lease was not renewed and terminated in September 2023. |
Collocation and Antenna Space Agreements. In connection with the completion of the Share Exchange, effective March 1, 2017, we entered into certain agreements pursuant to which we provide certain collocation and antenna space to HNS through February 2025 at the following locations: Cheyenne, Wyoming; Gilbert, Arizona; Monee, Illinois; Englewood, Colorado; and Spokane, Washington. During August 2017, we entered into certain other agreements pursuant to which we provide certain collocation and antenna space to HNS through August 2022 at the following locations: Monee, Illinois and Spokane, Washington. HNS has the option to renew each of these agreements for i four i three-year periods. In May 2022, HNS exercised its renewal option for a period ending in August 2025. HNS may terminate certain of these agreements with i 180 days’ prior written notice to us at the following locations: Englewood, Colorado; and Spokane, Washington. The fees for the services provided under these agreements depend, among other things, on the number of racks leased and/or antennas present at the location.
Also in connection with the Master Transaction Agreement, in September 2019, we entered into an agreement pursuant to which we provide HNS with antenna space and power in Cheyenne, Wyoming for a period of i five years commencing no later than October 2020, with i four i three-year renewal terms, with prior written notice no more than i 120 days but no less than i 90 days prior to the end of the then-current term.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
TT&C Agreement – Master Transaction Agreement. In September 2019, in connection with the Master Transaction Agreement, we entered into an agreement pursuant to which we provide TT&C services to EchoStar for a period ending in September 2021, with the option for EchoStar to renew for a i one-year period upon written notice at least i 90 days prior to the initial expiration (the “MTA TT&C Agreement”). The fees for services provided under the MTA TT&C Agreement are calculated at either: (i) a fixed fee or (ii) cost plus a fixed margin, which will vary depending on the nature of the services provided. Either party is able to terminate the MTA TT&C Agreement for any reason upon i 12 months’ notice. In June 2021, we amended the MTA TT&C Agreement to extend the term until September 2022 and added the option for EchoStar to renew for i three i one-year renewal terms. In August 2022, EchoStar exercised its first renewal option for a period ending in September 2023. In June 2023, EchoStar exercised its second renewal option for a period ending in September 2024.
“Cost of services”
During the three months ended September 30, 2023 and 2022, we incurred $ i 2 million and $ i 3 million, respectively, of costs for services provided to us by EchoStar. During the nine months ended September 30, 2023 and 2022, we incurred $ i 6 million and $ i 9 million, respectively, of costs for services provided to us by EchoStar. These amounts are recorded in “Cost of services” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The agreements pertaining to these expenses are discussed below.
Hughes Broadband Distribution Agreement. Effective October 1, 2012, dishNET Satellite Broadband L.L.C. (“dishNET Satellite Broadband”), our indirect wholly-owned subsidiary, and HNS entered into a Distribution Agreement (the “Distribution Agreement”) pursuant to which dishNET Satellite Broadband has the right, but not the obligation, to market, sell and distribute the HNS satellite Internet service (the “Service”). dishNET Satellite Broadband pays HNS a monthly per subscriber wholesale service fee for the Service based upon the subscriber’s service level, and, beginning January 1, 2014, certain volume subscription thresholds. The Distribution Agreement also provides that dishNET Satellite Broadband has the right, but not the obligation, to purchase certain broadband equipment from HNS to support the sale of the Service. On February 20, 2014, dishNET Satellite Broadband and HNS amended the Distribution Agreement which, among other things, extended the initial term of the Distribution Agreement through March 1, 2024.
Thereafter, the Distribution Agreement automatically renews for successive i one year terms unless either party gives written notice of its intent not to renew to the other party at least i 180 days before the expiration of the then-current term. Upon expiration or termination of the Distribution Agreement, the parties will continue to provide the Service to the then-current dishNET subscribers pursuant to the terms and conditions of the Distribution Agreement.
EchoStar IX. We lease certain satellite capacity from EchoStar on EchoStar IX. Subject to availability, we generally have the right to continue to lease satellite capacity from EchoStar on EchoStar IX on a month-to-month basis. This lease expired on December 31, 2022.
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DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
“Cost of sales – equipment and other”
During each of the three months ended September 30, 2023 and 2022, we incurred $ i i 1 / million for satellite hosting, operations and maintenance services as well as transmission of certain data. During each of the nine months ended September 30, 2023 and 2022, we incurred $ i i 4 / million for satellite hosting, operations and maintenance services as well as transmission of certain data. These amounts are recorded in “Cost of sales – equipment and other” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The agreements pertaining to these expenses are discussed below.
DBSD North America Agreement. On March 9, 2012, we completed the DBSD Transaction. During the second quarter of 2011, EchoStar acquired Hughes. Prior to our acquisition of DBSD North America and EchoStar’s acquisition of Hughes, DBSD North America and HNS entered into an agreement pursuant to which HNS provides, among other things, hosting, operations and maintenance services for DBSD North America’s satellite gateway and associated ground infrastructure. This agreement generally may be terminated by us at any time for convenience.
TerreStar Agreements. On March 9, 2012, we completed the TerreStar Transaction. Prior to our acquisition of substantially all the assets of TerreStar and EchoStar’s acquisition of Hughes, TerreStar and HNS entered into various agreements pursuant to which HNS provides, among other things, hosting, operations and maintenance services for TerreStar’s satellite gateway and associated ground infrastructure. These agreements generally may be terminated by us at any time for convenience.
Hughes Equipment and Services Agreement. In February 2019, we and HNS entered into an agreement pursuant to which HNS will provide us with HughesNet Service and HughesNet equipment for the transmission of certain data related to our 5G Network Deployment. This agreement has an initial term of i five years with automatic renewal for successive i one-year terms unless terminated by DISH Network with at least i 180 days’ written notice to HNS or by HNS with at least i 365 days’ written notice to DISH Network.
“Selling, general and administrative expenses”
During each of the three months ended September 30, 2023 and 2022, we incurred $ i i 3 / million for selling, general and administrative expenses for services provided to us by EchoStar. During the nine months ended September 30, 2023 and 2022, we incurred $ i 9 million and $ i 10 million, respectively, for selling, general and administrative expenses for services provided to us by EchoStar. These amounts are recorded in “Selling, general and administrative expenses” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). The agreements pertaining to these expenses are discussed below.
Real Estate Lease Agreements. We have entered into lease agreements pursuant to which we lease certain real estate from EchoStar. The rent on a per square foot basis for each of the leases is comparable to per square foot rental rates of similar commercial property in the same geographic area, and we are responsible for our portion of the taxes, insurance, utilities and maintenance of the premises. The term of each lease is set forth below:
| ● | Meridian Lease Agreement. We lease all of 9601 S. Meridian Blvd. in Englewood, Colorado for a period ending on December 31, 2023. |
| ● | 100 Inverness Lease Agreement. In connection with the completion of the Share Exchange, effective March 1, 2017, we lease certain space from EchoStar at 100 Inverness Terrace East, Englewood, Colorado for a period ending in December 2023. This agreement may be terminated by either party upon i 180 days’ prior notice. |
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DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Professional Services Agreement. Prior to 2010, in connection with the Spin-off, we entered into various agreements with EchoStar including the Transition Services Agreement, Satellite Procurement Agreement and Services Agreement, which all expired on January 1, 2010 and were replaced by a Professional Services Agreement. During 2009, we and EchoStar agreed that EchoStar shall continue to have the right, but not the obligation, to receive the following services from us, among others, certain of which were previously provided under the Transition Services Agreement: information technology, travel and event coordination, internal audit, legal, accounting and tax, benefits administration, program acquisition services and other support services. Additionally, we and EchoStar agreed that we shall continue to have the right, but not the obligation, to engage EchoStar to manage the process of procuring new satellite capacity for us (previously provided under the Satellite Procurement Agreement) and receive logistics, procurement and quality assurance services from EchoStar (previously provided under the Services Agreement) and other support services. In connection with the completion of the Share Exchange on February 28, 2017, DISH Network and EchoStar amended the Professional Services Agreement to, among other things, provide certain transition services to each other related to the Share Exchange Agreement. In addition, pursuant to the Master Transaction Agreement, we and EchoStar amended the Professional Services Agreement effective September 10, 2019 to, among other things, provide certain transition services to each other related to the Master Transaction Agreement and to remove certain services no longer necessary as a result of the Master Transaction Agreement. See above for further information on the Master Transaction Agreement.
During March 2020, we and EchoStar added a service under the Professional Services Agreement whereby we provide EchoStar with rights to use certain satellite capacity in exchange for certain credits to amounts owed by us to EchoStar under the TerreStar Agreement described above. The Professional Services Agreement renewed on January 1, 2023 for an additional i one-year period until January 1, 2024 and renews automatically for successive i one-year periods thereafter, unless terminated earlier by either party upon at least i 60 days’ notice. However, either party may terminate the Professional Services Agreement in part with respect to any particular service it receives for any reason upon at least i 30 days’ notice.
Revenue for services provided by us to EchoStar under the Professional Services Agreement is recorded in “Equipment sales and other revenue” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
Other Agreements - EchoStar
Tax Sharing Agreement. In connection with the Spin-off, we entered into a tax sharing agreement (the “Tax Sharing Agreement”) with EchoStar which governs our respective rights, responsibilities and obligations after the Spin-off with respect to taxes for the periods ending on or before the Spin-off. Generally, all pre-Spin-off taxes, including any taxes that are incurred as a result of restructuring activities undertaken to implement the Spin-off, are borne by us, and we will indemnify EchoStar for such taxes. However, we are not liable for and will not indemnify EchoStar for any taxes that are incurred as a result of the Spin-off or certain related transactions failing to qualify as tax-free distributions pursuant to any provision of Section 355 or Section 361 of the Internal Revenue Code of 1986, as amended (the “Code”) because of: (i) a direct or indirect acquisition of any of EchoStar’s stock, stock options or assets; (ii) any action that EchoStar takes or fails to take; or (iii) any action that EchoStar takes that is inconsistent with the information and representations furnished to the Internal Revenue Service (“IRS”) in connection with the request for the private letter ruling, or to counsel in connection with any opinion being delivered by counsel with respect to the Spin-off or certain related transactions. In such case, EchoStar is solely liable for, and will indemnify us for, any resulting taxes, as well as any losses, claims and expenses.
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DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
The Tax Sharing Agreement will only terminate after the later of the full period of all applicable statutes of limitations, including extensions, or once all rights and obligations are fully effectuated or performed. In light of the Tax Sharing Agreement, among other things, and in connection with our consolidated federal income tax returns for certain tax years prior to and for the year of the Spin-off, during 2013, we and EchoStar agreed upon a supplemental allocation of the tax benefits arising from certain tax items resolved in the course of the IRS’ examination of these consolidated tax returns. As a result, we agreed to pay EchoStar $ i 82 million of the tax benefit we received or will receive. Any payment to EchoStar, including accrued interest, will be made at such time as EchoStar would have otherwise been able to realize such tax benefit. As of September 30, 2023, we have paid $ i 13 million of the tax benefit received, leaving $ i 69 million remaining to be paid.
In addition, during 2013, we and EchoStar agreed upon a tax sharing arrangement for filing certain combined state income tax returns and a method of allocating the respective tax liabilities between us and EchoStar for such combined returns, through the taxable period ending on December 31, 2017 (the “State Tax Arrangement”). During the third quarter of 2018, we and EchoStar amended the Tax Sharing Agreement and the 2013 agreements (the “Amendment”).
Under the Amendment, among other things, we are entitled to apply the benefit of EchoStar’s 2009 net operating losses to our federal tax return for the year ended December 31, 2008, in exchange for paying EchoStar over time the value of the net annual federal income taxes paid by EchoStar that would have been otherwise offset by their 2009 net operating loss. In addition, the Amendment extends the term of the State Tax Arrangement for filing certain combined state income tax returns to the earlier to occur of: (1) termination of the Tax Sharing Agreement; (2) a change in control of either us or EchoStar; or (3) for any particular state, if we and EchoStar no longer file a combined tax return for such state. Beginning in 2020 and as it relates to 2020’s state tax returns, DISH Network and EchoStar no longer file combined tax returns in any states. Per the terms of the Amendment, certain tax benefits received or payable related to combined tax returns were satisfied in 2022.
Tax Matters Agreement – Share Exchange. In connection with the completion of the Share Exchange, we and EchoStar entered into a Tax Matters Agreement, which governs certain rights, responsibilities and obligations with respect to taxes of the Transferred Businesses pursuant to the Share Exchange. Generally, EchoStar is responsible for all tax returns and tax liabilities for the Transferred Businesses for periods prior to the Share Exchange, and we are responsible for all tax returns and tax liabilities for the Transferred Businesses from and after the Share Exchange. Both we and EchoStar have made certain tax-related representations and are subject to various tax-related covenants after the consummation of the Share Exchange. Both we and EchoStar have agreed to indemnify each other if there is a breach of any such tax representation or violation of any such tax covenant and that breach or violation results in the Share Exchange not qualifying for tax free treatment for the other party. In addition, we have agreed to indemnify EchoStar if the Transferred Businesses are acquired, either directly or indirectly (e.g., via an acquisition of us), by one or more persons and such acquisition results in the Share Exchange not qualifying for tax free treatment. The Tax Matters Agreement supplements the Tax Sharing Agreement described above, which continues in full force and effect.
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DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Tax Matters Agreement – Master Transaction Agreement. In connection with the completion of the Master Transaction Agreement, we and EchoStar entered into a Tax Matters Agreement, which governs certain rights, responsibilities and obligations with respect to taxes of the BSS Business pursuant to the Master Transaction Agreement. Generally, EchoStar is responsible for all tax returns and tax liabilities for the BSS Business for periods prior to the Master Transaction Agreement, and we are responsible for all tax returns and tax liabilities for the BSS Business from and after the Master Transaction Agreement. Both we and EchoStar have made certain tax-related representations in contemplation of the Master Transaction Agreement. Both we and EchoStar have agreed to indemnify each other if there is a breach of any such tax representation and that breach results in the Master Transaction Agreement not qualifying for tax free treatment for the other party. In addition, we have agreed to indemnify EchoStar if the BSS Business is acquired, either directly or indirectly (e.g., via an acquisition of us), by one or more persons and such acquisition results in the Master Transaction Agreement not qualifying for tax free treatment. The Tax Matters Agreement - Master Transaction Agreement supplements the Tax Sharing Agreement described above, which continues in full force and effect.
Patent Cross-License Agreements. In December 2011, we and EchoStar entered into separate patent cross-license agreements with the same third-party whereby: (i) EchoStar and such third-party licensed their respective patents to each other subject to certain conditions; and (ii) we and such third-party licensed our respective patents to each other subject to certain conditions (each, a “Cross-License Agreement”). Each Cross License Agreement covers patents acquired by the respective party prior to January 1, 2017 and aggregate payments under both Cross-License Agreements total less than $ i 10 million. In December 2016, we and EchoStar independently exercised our respective options to extend each Cross-License Agreement to include patents acquired by the respective party prior to January 1, 2022.
Rovi License Agreement. On August 19, 2016, we entered into a i ten-year patent license agreement (the “Rovi License Agreement”) with Rovi Corporation (“Rovi”) and, for certain limited purposes, EchoStar. EchoStar is a party to the Rovi License Agreement solely with respect to certain provisions relating to the prior patent license agreement between EchoStar and Rovi. There are i no payments between us and EchoStar under the Rovi License Agreement.
Hughes Broadband Master Services Agreement. In March 2017, DISH Network L.L.C. (“DNLLC”) and HNS entered into the MSA pursuant to which DNLLC, among other things: (i) has the right, but not the obligation, to market, promote and solicit orders for the Hughes broadband satellite service and related equipment; and (ii) installs Hughes service equipment with respect to activations generated by DNLLC. Under the MSA, HNS will make certain payments to DNLLC for each Hughes service activation generated, and installation performed, by DNLLC. Payments from HNS for services provided are recorded in “Service revenue” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). For the three months ended September 30, 2023 and 2022, these payments were less than $ i 1 million and $ i 2 million, respectively. For the nine months ended September 30, 2023 and 2022, these payments were $ i 1 million and $ i 6 million, respectively. The MSA has an initial term of i five years with automatic renewal for successive i one-year terms. After the first anniversary of the MSA, either party has the ability to terminate the MSA, in whole or in part, for any reason upon at least i 90 days’ notice to the other party. Upon expiration or termination of the MSA, HNS will continue to provide the Hughes service to subscribers and make certain payments to DNLLC pursuant to the terms and conditions of the MSA. For the three months ended September 30, 2023 and 2022, we purchased broadband equipment from HNS of i zero and $ i 3 million, respectively, under the MSA. For the nine months ended September 30, 2023 and 2022, we purchased broadband equipment from HNS of i zero and $ i 7 million, respectively, under the MSA.
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DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
Intellectual Property and Technology License Agreement – Share Exchange. In connection with the completion of the Share Exchange, effective March 1, 2017, we and EchoStar entered into an Intellectual Property and Technology License Agreement (“IPTLA”), pursuant to which we and EchoStar license to each other certain intellectual property and technology. The IPTLA will continue in perpetuity, unless mutually terminated by the parties. Pursuant to the IPTLA, EchoStar granted to us a license to its intellectual property and technology for use by us, among other things, in connection with our continued operation of the Transferred Businesses acquired pursuant to the Share Exchange Agreement, including a limited license to use the “ECHOSTAR” trademark during a transition period. EchoStar retains full ownership of the “ECHOSTAR” trademark. In addition, we granted a license back to EchoStar, among other things, for the continued use of all intellectual property and technology transferred to us pursuant to the Share Exchange Agreement that is used in EchoStar’s retained businesses.
Intellectual Property and Technology License Agreement – Master Transaction Agreement. In connection with the completion of the Master Transaction Agreement, effective September 10, 2019, we and EchoStar entered into an IPTLA (the “MTA IPTLA”), pursuant to which we and EchoStar license to each other certain intellectual property and technology. The MTA IPTLA will continue in perpetuity, unless mutually terminated by the parties. Pursuant to the MTA IPTLA, EchoStar granted to us a license to its intellectual property and technology for use by us, among other things, in connection with our continued operation of the BSS Business acquired pursuant to the Master Transaction Agreement, including a limited license to use the “ESS” and “ECHOSTAR SATELLITE SERVICES” trademarks during a transition period. EchoStar retains full ownership of the “ESS” and “ECHOSTAR SATELLITE SERVICES” trademarks. In addition, we granted a license back to EchoStar, among other things, for the continued use of all intellectual property and technology transferred to us pursuant to the Master Transaction Agreement that is used in EchoStar’s retained businesses.
Related Party Transactions with NagraStar L.L.C.
We own a i 50% interest in NagraStar, a joint venture that is our primary provider of encryption and related security systems intended to assure that only authorized customers have access to our programming. Certain payments related to NagraStar are recorded in “Cost of services” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). In addition, certain other payments are initially included in “Inventory” and are subsequently capitalized as “Property and equipment, net” on our Condensed Consolidated Balance Sheets or expensed as “Selling, general and administrative expenses” or “Cost of services” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) when the equipment is deployed. We record all payables in “Trade accounts payable” or “Other accrued expenses” on our Condensed Consolidated Balance Sheets. Our investment in NagraStar is accounted for using the equity method.
The table below summarizes our transactions with NagraStar:
i
| | | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | | ||||||||
| | September 30, | | | |||||||||
| | 2023 |
| 2022 | | 2023 |
| 2022 |
| ||||
| | (In thousands) | | ||||||||||
Purchases (including fees): | | | | | | | | | | | | | |
Purchases from NagraStar |
| $ | i 8,972 |
| $ | i 10,285 | | $ | i 28,012 |
| $ | i 32,713 | |
| | | | | | | | | | | | | |
| | As of | | | | | | | | ||||
| | September 30, | | | | | | | | | |||
| | 2023 |
| 2022 | | | | | | | | ||
| | (In thousands) | | | | | | | | ||||
Amounts Payable and Commitments: | | | | | | | | | | | | | |
Amounts payable to NagraStar |
| $ | i 7,235 |
| $ | i 7,422 | | | | | | | |
Commitments to NagraStar |
| $ | i 2,504 |
| $ | i 3,272 | | | | | | | |
| | | | | | | | | | | | | |
/
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DISH NETWORK CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - Continued
(Unaudited)
144
14.Subsequent Events
On November 5, 2023, we entered into an Asset Purchase Agreement, License Purchase Agreement, and other ancillary transaction agreements with Liberty Latin America (“Liberty”) and its affiliate providing for the sale of certain of our wireless assets in Puerto Rico and the US Virgin Islands (the “Transaction”). Beginning on the financial closing, which is subject to various closing conditions, including but not limited to regulatory approvals from the FCC and DOJ, we will receive payments totaling $ i 256 million over a i three-year period.
The consideration also includes a right for us to receive preferential international roaming rates and credits within Liberty’s footprint.
Either we or Liberty may terminate the Transaction under certain circumstances, including, but not limited to, if the Transaction is not completed within i twelve months from signing the agreements, which will automatically be extended for an additional i three-month period in the event that the required regulatory approvals have not been obtained.
/
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Item 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
You should read the following management’s discussion and analysis of our financial condition and results of operations together with the condensed consolidated financial statements and notes to our financial statements included elsewhere in this Quarterly Report on Form 10-Q. This management’s discussion and analysis is intended to help provide an understanding of our financial condition, changes in financial condition and results of our operations and contains forward-looking statements that involve risks and uncertainties. The forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about our industry, business and future financial results. Our actual results could differ materially from the results contemplated by these forward-looking statements due to a number of factors, including those discussed in our Annual Report on Form 10-K for the year ended December 31, 2022 and this Quarterly Report on Form 10-Q under the caption “Item 1A. Risk Factors.” Furthermore, such forward-looking statements speak only as of the date of this Quarterly Report on Form 10-Q, and we expressly disclaim any obligation to update any forward-looking statements.
Overview
We currently operate two primary business segments: (1) Pay-TV; and (2) Wireless. Our Wireless business segment consists of two business units, Retail Wireless and 5G Network Deployment.
Our Pay-TV business strategy is to be the best provider of video services in the United States by providing products with the best technology, outstanding customer service, and great value. We offer pay-TV services under the DISH® brand and the SLING® brand (collectively “Pay-TV” services). The DISH branded pay-TV service consists of, among other things, FCC licenses authorizing us to use direct broadcast satellite (“DBS”) and Fixed Satellite Service (“FSS”) spectrum, our owned and leased satellites, receiver systems, broadcast operations, a leased fiber optic network, in-home service and call center operations, and certain other assets utilized in our operations (“DISH TV”). We also design, develop and distribute receiver systems and provide digital broadcast operations, including satellite uplinking/downlinking, transmission and other services to third-party pay-TV providers. The SLING branded pay-TV services consist of, among other things, multichannel, live-linear and on-demand streaming over-the-top (“OTT”) Internet-based domestic, international, Latino and Freestream video programming services (“SLING TV”). We promote our Pay-TV services by providing our subscribers with a better “price-to-value” relationship and experience than those available from other subscription television service providers. We market our SLING TV services to consumers who do not subscribe to traditional satellite and cable pay-TV services, as well as to current and recent traditional pay-TV subscribers who desire a lower cost alternative.
Our Retail Wireless business unit offers prepaid and postpaid retail wireless services to subscribers primarily under our Boost Mobile®, Boost Infinite® and Gen Mobile® brands (“Retail Wireless” services), as well as a competitive portfolio of wireless devices. We offer customers value by providing choice and flexibility in our Retail Wireless services. We offer competitive consumer plans with no annual service contracts. Our Retail Wireless business strategy is to expand our current target segments and profitably grow our subscriber base by acquiring and retaining high quality subscribers while we continue our 5G Network Deployment. We intend to acquire high quality subscribers by providing competitive offers, choice and outstanding customer service that better meet those subscribers’ needs and budget.
We are currently operating our Retail Wireless business unit primarily as a mobile virtual network operator (“MVNO”) as we continue our 5G Network Deployment and commercialize our 5G Network, as defined below. We are transitioning our Retail Wireless business unit to a mobile network operator (“MNO”) as our 5G Network becomes commercially available and we are currently activating subscribers onto our 5G Network. As an MVNO, today we depend on T-Mobile and AT&T to provide us with network services under the amended Master Network Services Agreement (“MNSA”) and Network Services Agreement (the “NSA”), respectively. Under the NSA, we expect AT&T will become our primary network services provider.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Our 5G Network Deployment business unit strategy is to commercialize our Wireless spectrum licenses through the completion of the nation’s first cloud-native, Open Radio Access Network (“O-RAN”) based 5G network (our “5G Network Deployment”). We have committed to deploy a facilities-based 5G broadband network (our “5G Network”) capable of serving increasingly larger portions of the U.S. population at different deadlines, including 20% of the U.S. population by June 2022 and 70% of the U.S. population by June 2023. If by June 2023, we are offering 5G broadband service to at least 50% of the U.S. population but less than 70% of the U.S. population, the 70% June 2023 deadline will be extended automatically to June 2025; however, as a result, we may, under certain circumstances, potentially be subject to certain penalties.
On June 14, 2022, we announced we had successfully reached our 20% population coverage requirement. In addition, we announced and certified to the FCC that as of June 14, 2023, we offer 5G broadband service to over 73% of the U.S. population, or more than 246 million Americans nationwide, and have deployed over 16,000 5G cell sites. On September 29, 2023, the FCC confirmed we have met all of our June 14, 2023 band-specific 5G deployment commitments, and two of our three nationwide 5G commitments. The single remaining 5G commitment, that at least 70% of the U.S. population has access to average download speeds equal to 35 Mbps, will be confirmed using the drive test methodology agreed to and approved by the FCC. We have six months from September 29, 2023 to complete this drive test. We now have the largest commercial deployment of 5G voice over new radio (“VoNR”) in the world, reaching more than 100 million Americans in over 60 markets, and we are launching new markets every month.
As a result of us providing 5G broadband service to over 50% of the U.S. population by June 14, 2023, the final build-out deadlines have been extended automatically to June 14, 2025 for us to offer 5G broadband service to at least 70% of the population in each Economic Area for the 700 MHz Licenses and AWS-4 Licenses and at least 75% of the population in each Economic Area for the H Block Licenses.
Recent Developments
As previously disclosed, on August 8, 2023, we entered into an Agreement and Plan of Merger (the “Original Merger Agreement”) with EchoStar and Eagle Sub Corp, a Nevada corporation and a wholly-owned subsidiary of DISH Network (“Eagle Sub”), providing for the merger of Eagle Sub with and into EchoStar, with EchoStar surviving the merger as a wholly-owned subsidiary of DISH Network. On October 2, 2023, we entered into an Amended and Restated Agreement and Plan of Merger (the “Amended Merger Agreement”) with EchoStar and EAV Corp., a Nevada corporation and a wholly-owned subsidiary of EchoStar (“Merger Sub”), which revises the structure of the merger of DISH Network and EchoStar. The Amended Merger Agreement provides, among other things, that subject to the satisfaction or waiver of the conditions set forth therein, Merger Sub will merge with and into DISH Network (the “Merger”), with DISH Network surviving the Merger as a wholly-owned subsidiary of EchoStar. Our Board of Directors, acting upon the unanimous recommendation of a special transaction committee of independent directors of our Board of Directors (the “DISH Network Special Committee”), unanimously approved, adopted and declared advisable the Amended Merger Agreement and the transactions contemplated by the Amended Merger Agreement.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
On the terms and subject to the conditions set forth in the Amended Merger Agreement, at the effective time of the Merger (the “Effective Time”), (a) each share of our Class A common stock and our Class C Common Stock, par value $0.01 per share, outstanding immediately prior to the Effective Time, will be converted into the right to receive a number of validly issued, fully paid and non-assessable shares of EchoStar Class A Common Stock, par value $0.001 per share (“EchoStar Class A Common Stock”), equal to 0.350877 (the “Exchange Ratio”) and (b) each share of our Class B common stock, par value $0.01 per share, outstanding immediately prior to the Effective Time will be converted into the right to receive a number of validly issued, fully paid and non-assessable shares of EchoStar Class B Common Stock, par value $0.001 per share (the “EchoStar Class B Common Stock” and, together with the EchoStar Class A Common Stock, the “EchoStar Common Stock”), equal to the Exchange Ratio, in each case except for any shares of our Class A common stock, Class B common stock and Class C common stock (collectively, “DISH Common Stock”) that are held in DISH Network’s treasury or held directly by EchoStar or Merger Sub immediately prior to the Effective Time. If the Merger is completed, the shares of the our Class A common stock will be delisted from the Nasdaq Global Select Market (“NASDAQ”) and deregistered under the Securities Exchange Act of 1934, as amended.
The respective obligations of DISH Network and EchoStar to consummate the transactions contemplated by the Amended Merger Agreement are subject to the satisfaction or waiver of a number of conditions, including, among others, (a) the adoption and approval of the Amended Merger Agreement and approval of the Merger by the affirmative vote of the holders of a majority of DISH Common Stock entitled to vote thereon, which condition was satisfied through the execution and delivery of a written consent (the “Ergen DISH Written Consent”) by the Ergen DISH Stockholders (as defined in the Amended Merger Agreement); and (b) the affirmative vote of a majority of the votes cast by the holders of EchoStar Common Stock entitled to vote thereon with respect to the issuance of shares of EchoStar Common Stock in connection with the Merger, which condition was satisfied through the execution and delivery of a written consent (the “Ergen EchoStar Written Consent”) by the Ergen EchoStar Stockholders (as defined in the Amended Merger Agreement).
Concurrently with the entry into the Amended Merger Agreement, the Ergen EchoStar Stockholders, the Ergen DISH Stockholders (collectively, the “Ergen Stockholders”), DISH Network and EchoStar entered into an amended and restated support agreement (the “Amended Support Agreement”), pursuant to which the Ergen Stockholders agreed, among other things: (a) not to transfer shares of DISH Common Stock or EchoStar Common Stock prior to the earlier of the Effective Time and the termination of the Amended Merger Agreement in accordance with the terms thereof, subject to certain limited exceptions and (b) to not vote, or cause or direct to be voted, the shares of EchoStar Class A Common Stock owned by them as of the closing of the Merger, other than with respect of any matter on presented to the holders of EchoStar Class A Common Stock on which holders of EchoStar Class B Common Stock are not entitled to vote, for three years following the closing of the Merger.
For more information and a copy of the Amended Merger Agreement and the Amended Support Agreement, see the Form 8-K of DISH Network Corporation filed on October 3, 2023.
Other Developments
Cyber-Security Incident
On February 23, 2023, we announced on our quarterly earnings call that we had experienced a network outage that affected internal servers and IT telephony. We immediately activated our incident response and business continuity plans designed to contain, assess and remediate the situation. We engaged the services of cyber-security experts and outside advisors to assist in the evaluation of the situation, and once we determined that the outage was due to a cyber-security incident, we promptly notified appropriate law enforcement authorities.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
On February 28, 2023, we further disclosed that certain data had been extracted from our IT systems as part of this incident. Our investigation into the extent of the incident is now completed. We have determined that our customer databases were not accessed in this incident. However, we have confirmed that certain employee-related records as well as a limited number of other records containing personal information were among the data extracted. We have taken steps to protect the affected records and personal information, and we received confirmation that the extracted data has been deleted. While we have no evidence that this data has been misused, we have notified individuals whose data was extracted.
Our DISH TV, SLING TV and Retail Wireless services, along with our wireless and data networks remained operational at all times during the incident. As of March 31, 2023, all significant systems had been restored.
During the first quarter of 2023, we incurred substantially all of our cyber-security-related expenses for this matter, including, but not limited to, costs to remediate the incident and provide additional customer support. During the second and third quarters of 2023, we did not incur additional material expenses resulting from the cyber-security incident and do not expect to incur material expenses in future periods. During the nine months ended September 30, 2023, we incurred approximately $30 million in cyber-security-related expenses, which are recorded in “Cost of services” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
Economic Environment
During 2022 and the first nine months of 2023, we experienced significant inflationary pressures in our commodity and labor costs resulting from the macroeconomic environment in the United States, which has significantly impacted our overall operating results.
EXPLANATION OF KEY METRICS AND OTHER ITEMS
Service revenue. “Service revenue” consists principally of Pay-TV and Wireless subscriber revenue. Certain of the amounts included in “Service revenue” are not recurring on a monthly basis.
Equipment sales and other revenue. “Equipment sales and other revenue” principally includes the sale of wireless devices, the non-subsidized sales of Pay-TV equipment and the licensing of certain intellectual property.
Cost of services. “Cost of services” principally includes Pay-TV programming expenses and other operating costs related to our Pay-TV segment and costs of Wireless services (including costs incurred under the MNSA and NSA).
Cost of sales - equipment and other. “Cost of sales – equipment and other” principally includes the cost of wireless devices and other related items, certain direct costs of wireless mobile network operations to deliver wireless voice and data services, as well as costs related to the non-subsidized sales of Pay-TV equipment. Costs are generally recognized as products are delivered to customers and the related revenue is recognized.
Selling, general and administrative expenses. “Selling, general and administrative expenses” consists primarily of direct sales costs, advertising, third-party commissions related to the acquisition of subscribers and employee-related costs associated with administrative services such as legal, information systems, and accounting and finance. In addition, “Selling, general and administrative expenses” includes costs related to the installation of equipment for our new Pay-TV subscribers and the cost of subsidized sales of Pay-TV equipment for new subscribers.
Interest expense, net of amounts capitalized. “Interest expense, net of amounts capitalized” primarily includes interest expense associated with our long-term debt (net of capitalized interest), prepayment premiums, amortization of debt discounts and debt issuance costs associated with our long-term debt, and interest expense associated with our finance lease obligations.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Other, net. The main components of “Other, net” are gains and losses realized on the sale and/or conversion of marketable and non-marketable investment securities and derivative instruments, impairment of marketable and non-marketable investment securities, unrealized gains and losses from changes in fair value of certain marketable and non-marketable investment securities and derivative instruments, 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” and 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.
Operating income before depreciation and amortization (“OIBDA”). OIBDA is defined as “Operating income (loss)” plus “Depreciation and amortization.” This “non-GAAP measure” is reconciled to “Operating income (loss)” in our discussion of “Results of Operations” below.
DISH TV subscribers. We include customers obtained through direct sales, independent third-party retailers and other independent third-party distribution relationships in our DISH TV subscriber count. We also provide DISH TV services to hotels, motels and other commercial accounts. For certain of these commercial accounts, we divide our total revenue for these commercial accounts by $34.99, and include the resulting number, which is substantially smaller than the actual number of commercial units served, in our DISH TV subscriber count.
SLING TV subscribers. We include customers obtained through direct sales and third-party marketing agreements in our SLING TV subscriber count. SLING TV subscriber additions are recorded net of disconnects. SLING TV customers receiving service for no charge, under certain new subscriber promotions, are excluded from our SLING TV subscriber count. For customers who subscribe to multiple SLING TV packages, each customer is only counted as one SLING TV subscriber.
Pay-TV subscribers. Our Pay-TV subscriber count includes all DISH TV and SLING TV subscribers discussed above. For customers who subscribe to both our DISH TV services and our SLING TV services, each subscription is counted as a separate Pay-TV 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 Pay-TV subscriber, or Pay-TV ARPU, by dividing average monthly Pay-TV segment “Service 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. SLING TV subscribers on average purchase lower priced programming services than DISH TV subscribers, and therefore, as SLING TV subscribers increase as a percentage of total Pay-TV subscribers, it has had a negative impact on Pay-TV ARPU.
DISH TV average monthly subscriber churn rate (“DISH 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 our “DISH TV churn rate” for any period by dividing the number of DISH TV subscribers who terminated service during the period by the average number of DISH TV subscribers for the same period, and further dividing by the number of months in the period. The average number of DISH TV subscribers is calculated for the period by adding the average number of DISH TV subscribers for each month and dividing by the number of months in the period. The average number of DISH TV subscribers for each month is calculated by adding the beginning and ending DISH TV subscribers for the month and dividing by two.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
DISH TV SAC. Subscriber acquisition cost measures are commonly used by those evaluating traditional companies in the pay-TV industry. We are not aware of any uniform standards for calculating the “average subscriber acquisition costs per new DISH TV subscriber activation,” or DISH 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 DISH TV SAC is calculated using all costs of acquiring DISH TV subscribers (e.g., subsidized equipment, advertising, installation, commissions and direct sales, etc.) which are included in “Selling, general and administrative expenses,” plus capitalized payments made under certain sales incentive programs and the value of equipment capitalized under our lease program for new DISH TV subscribers, divided by gross new DISH TV subscriber activations. We include all new DISH TV subscribers in our calculation, including DISH TV subscribers added with little or no subscriber acquisition costs.
Wireless subscribers. We include prepaid and postpaid customers obtained through direct sales, independent third-party retailers and other independent third-party distribution relationships in our Wireless subscriber count. Our Wireless subscriber count includes all ACP/Gen Mobile subscribers discussed below. Our gross new Wireless subscriber activations exclude all ACP/Gen Mobile subscribers as we record these subscribers net of disconnects, as discussed below.
Affordable Connectivity Program/Gen Mobile subscribers (“ACP/Gen Mobile subscribers”). The Emergency Broadband Benefit Program (“EBBP”) was launched by the FCC in February of 2021 to support broadband services and devices to help low-income individuals that meet certain eligibility criteria. The Affordable Connectivity Program (“ACP”) replaced the EBBP on December 31, 2021. Our ACP/Gen Mobile subscribers have a significantly higher churn rate compared to our other Wireless subscribers and we incur lower costs to acquire these subscribers. Therefore, our ACP/Gen Mobile subscriber additions are recorded net of disconnects.
Wireless average monthly revenue per subscriber (“Wireless 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 average monthly revenue per Wireless subscriber, or Wireless ARPU, by dividing average monthly Retail Wireless business unit “Service revenue” for the period by our average number of Wireless subscribers for the period. The average number of Wireless subscribers is calculated for the period by adding the average number of Wireless subscribers for each month and dividing by the number of months in the period. The average number of Wireless subscribers for each month is calculated by adding the beginning and ending Wireless subscribers for the month and dividing by two.
Wireless average monthly subscriber churn rate (“Wireless 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 our “Wireless churn rate” for any period by dividing the number of Wireless subscribers who terminated service during the period by the average number of Wireless subscribers for the same period, and further dividing by the number of months in the period. The average number of Wireless subscribers is calculated for the period by adding the average number of Wireless subscribers for each month and dividing by the number of months in the period. The average number of Wireless subscribers for each month is calculated by adding the beginning and ending Wireless subscribers for the month and dividing by two. ACP/Gen Mobile subscribers are excluded from our calculation of our Wireless churn rate.
Free cash flow. We define free cash flow as “Net cash flows from operating activities” less “Purchases of property and equipment” and “Capitalized interest related to FCC authorizations,” as shown on our Condensed Consolidated Statements of Cash Flows.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
RESULTS OF OPERATIONS – Segments
Business Segments
We currently operate two primary business segments: (1) Pay-TV; and (2) Wireless. Our Wireless segment consists of two business units, the Retail Wireless business unit and 5G Network Deployment business unit. Revenue and operating income (loss) by segment are shown in the table below:
Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022.
| | | | | | | | | | | |
| | For the Three Months Ended | | | | | | ||||
| | September 30, | | Variance | |||||||
| | 2023 |
| 2022 | |
| Amount | | % | ||
| | (In thousands) | | | |||||||
Revenue: | | | | | | | | | | | |
Pay-TV | | $ | 2,807,101 | | $ | 3,078,418 | | $ | (271,317) | | (8.8) |
Wireless | | | 900,302 | | | 1,018,132 | | | (117,830) | | (11.6) |
Eliminations | | | (2,887) | | | (1,099) | | | (1,788) | | * |
Total revenue | | $ | 3,704,516 | | $ | 4,095,451 | | $ | (390,935) | | (9.5) |
| | | | | | | | | | | |
Operating income (loss): | | | | | | | | | | | |
Pay-TV | | $ | 589,465 | | $ | 647,654 | | $ | (58,189) | | (9.0) |
Wireless | | | (631,271) | | | (220,625) | | | (410,646) | | * |
Total operating income (loss) | | $ | (41,806) | | $ | 427,029 | | $ | (468,835) | | * |
| | | | | | | | | | | |
*Percentage is not meaningful
Total revenue. Our consolidated revenue totaled $3.705 billion for the three months ended September 30, 2023, a decrease of $391 million or 9.5% compared to the same period in 2022. The net decrease primarily resulted from the decrease in revenue from our Pay-TV segment and our Wireless segment.
Total operating income (loss). Our consolidated operating loss totaled $42 million for the three months ended September 30, 2023, compared to operating income of $427 million during the same period in 2022. This change primarily resulted from an increase in operating loss from our Wireless segment and to a lesser extent a decrease in operating income from our Pay-TV segment.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022.
| | | | | | | | | | | |
| | For the Nine Months Ended | | | | | | ||||
| | September 30, | | Variance | |||||||
| | 2023 |
| 2022 | |
| Amount | | % | ||
| | (In thousands) | | | |||||||
Revenue: | | | | | | | | | | | |
Pay-TV | | $ | 8,754,372 | | $ | 9,399,244 | | $ | (644,872) | | (6.9) |
Wireless | | | 2,824,550 | | | 3,241,590 | | | (417,040) | | (12.9) |
Eliminations | | | (5,847) | | | (4,800) | | | (1,047) | | (21.8) |
Total revenue | | $ | 11,573,075 | | $ | 12,636,034 | | $ | (1,062,959) | | (8.4) |
| | | | | | | | | | | |
Operating income (loss): | | | | | | | | | | | |
Pay-TV | | $ | 1,985,490 | | $ | 2,185,171 | | $ | (199,681) | | (9.1) |
Wireless | | | (1,497,539) | | | (514,847) | | | (982,692) | | * |
Total operating income (loss) | | $ | 487,951 | | $ | 1,670,324 | | $ | (1,182,373) | | (70.8) |
| | | | | | | | | | | |
*Percentage is not meaningful
Total revenue. Our consolidated revenue totaled $11.573 billion for the nine months ended September 30, 2023, a decrease of $1.063 billion or 8.4% compared to the same period in 2022. The net decrease primarily resulted from the decrease in revenue from our Pay-TV segment and our Wireless segment.
Total operating income (loss). Our consolidated operating income totaled $488 million for the nine months ended September 30, 2023, a decrease of $1.182 billion compared to the same period in 2022. The net decrease primarily resulted from an increase in operating loss from our Wireless segment and to a lesser extent a decrease in operating income from our Pay-TV segment.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Pay-TV Segment
We offer Pay-TV services under the DISH brand and the SLING brand. As of September 30, 2023, we had 8.840 million Pay-TV subscribers in the United States, including 6.720 million DISH TV subscribers and 2.120 million SLING TV subscribers.
We promote our Pay-TV services by providing our subscribers with better service, technology and value than those available from other subscription television service providers. We offer a wide selection of video services under the DISH TV brand, with access to hundreds of channels depending on the level of subscription. Our standard programming packages generally include programming provided by national cable networks. We also offer programming packages that include local broadcast networks, specialty sports channels, premium movie channels and Latino and international programming. We market our SLING TV services to consumers who do not subscribe to traditional satellite and cable pay-TV services, as well as to current and recent traditional pay-TV subscribers who desire a lower cost alternative. Our SLING TV services require an Internet connection and are available on multiple streaming-capable devices including, among others, streaming media devices, TVs, tablets, computers, game consoles and phones. We offer SLING domestic, SLING International, SLING Latino and SLING Freestream video programming services.
Trends in our Pay-TV Segment
Competition
Competition has intensified in recent years 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. We face substantial competition from established pay-TV providers and broadband service providers and increasing competition from companies providing/facilitating the delivery of video content via the Internet to computers, televisions, and other streaming and mobile devices, including wireless service providers. In recent years, industry consolidation and convergence has created competitors with greater scale and multiple product/service offerings. These developments, among others, have contributed to intense and increasing competition, and we expect such competition to continue.
We incur significant costs to retain our existing DISH TV subscribers, generally as a result of upgrading their equipment to next generation receivers, primarily including our Hopper® receivers, and by providing retention credits. Our DISH TV subscriber retention costs may vary significantly from period to period.
Many of our competitors have been especially aggressive by offering discounted programming and services for both new and existing subscribers, including, but not limited to, bundled offers combining broadband, video and/or wireless services and other promotional offers. Certain competitors have been able to subsidize the price of video services with the price of broadband and/or wireless services.
Our Pay-TV services also face increased competition from programmers and other companies who distribute video directly to consumers over the Internet, as well as traditional satellite television providers, cable companies and large telecommunications companies that are increasing their Internet-based video offerings. We also face competition from providers of video content, many of which are providers of our programming content, that distribute content over the Internet including services with live-linear television programming, as well as single programmer offerings and offerings of large libraries of on-demand content, including in certain cases original content. These product offerings include, but are not limited to, Netflix, Hulu, Apple+, Prime Video, YouTube TV, Disney+, ESPN+, Paramount+, Max, STARZ, Peacock, Fubo, Philo and Tubi.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Significant changes in consumer behavior regarding the means by which consumers obtain video entertainment and information in response to digital media competition could have a material adverse effect on our business, results of operations and financial condition or otherwise disrupt our business.
In particular, consumers have shown increased interest in viewing certain video programming in any place, at any time and/or on any broadband or Internet-connected device they choose. Online content providers may cause our subscribers to disconnect our DISH TV services (“cord cutting”), downgrade to smaller, less expensive programming packages (“cord shaving”) or elect to purchase through these online content providers a certain portion of the services that they would have historically purchased from us.
Mergers and acquisitions, joint ventures and alliances among cable television providers, telecommunications companies, programming providers and others may result in, among other things, greater scale and financial leverage and increase the availability of offerings from providers capable of bundling video, broadband and/or wireless services in competition with our services and may exacerbate the risks described under the caption “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022 and elsewhere in our public filings. These transactions may affect us adversely by, among other things, making it more difficult for us to obtain access to certain programming networks on nondiscriminatory and fair terms, or at all.
Our Pay-TV subscriber base has been declining due to, among other things, the factors described above. There can be no assurance that our Pay-TV subscriber base will not continue to decline and that the pace of such decline will not accelerate. As our Pay-TV subscriber base continues to decline, it could have a material adverse long-term effect on our business, results of operations, financial condition and cash flow.
Programming
Our ability to compete successfully will depend, among other things, on 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 “Cost of services” and the largest component of our total expense. We expect these costs to continue to increase due to contractual price increases and the renewal of long-term programming contracts on less favorable pricing terms and certain programming costs are rising at a much faster rate than wages or inflation. In particular, the rates we are charged for retransmitting local broadcast channels have been increasing substantially and may exceed our ability to increase our prices to our subscribers. Going forward, our margins may face pressure if we are unable to renew our long-term programming contracts on acceptable pricing and other economic terms or if we are unable to pass these increased programming costs on to our subscribers.
Increases in programming costs have caused us to increase the rates that we charge to our subscribers, which could in turn cause our existing Pay-TV subscribers to disconnect our services or cause potential new Pay-TV subscribers to choose not to subscribe to our services. Additionally, even if our subscribers do not disconnect our services, they may purchase through new and existing online content providers a certain portion of the services that they would have historically purchased from us.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Furthermore, our net Pay-TV subscriber additions, gross new DISH TV subscriber activations, and DISH TV churn rate may be negatively impacted if we are unable to renew our long-term programming carriage contracts. In the past, our net Pay-TV subscriber additions, gross new DISH TV subscriber activations, and DISH TV churn rate have been negatively impacted as a result of programming interruptions and threatened programming interruptions in connection with the scheduled expiration of programming carriage contracts with content providers. There can be no assurance that the removal of any channels will not have a material adverse effect on our business, results of operations and financial condition or otherwise disrupt our business. We cannot predict with any certainty the impact to our net Pay-TV subscriber additions, gross new DISH TV subscriber activations, and DISH TV churn rate resulting from programming interruptions or threatened programming interruptions that may occur in the future. As a result, we may at times suffer from periods of lower net Pay-TV subscriber additions or higher net Pay-TV subscriber losses.
Other Developments
Adaptive Bitrate Streaming Patents
Through our subsidiaries, we hold dozens of issued United States and foreign patents that relate to Adaptive Bitrate Streaming. On September 9, 2022, the chief administrative law judge at the United States International Trade Commission (“ITC”) issued an Initial Determination holding that the video streaming in certain Peloton, NordicTrack and Mirror exercise equipment infringes four of those patents, and recommended that the ITC prevent the importation of the infringing products. On March 8, 2023, the ITC issued its Final Determination, which affirmed the Initial Determination for three of the four patents in all material aspects, and issued the recommended exclusion and cease and desist orders, which will become effective after a Presidential review period. On February 9, 2023, we entered into a confidential license agreement covering Mirror exercise equipment that resolves our litigation involving those products. On May 1, 2023, we entered into a $75 million license agreement covering Peloton exercise equipment that resolves our litigation involving those products. During the nine months ended September 30, 2023, we recorded the $75 million license agreement in “Equipment sales and other revenue” on our Condensed Consolidated Statements of Operations and Comprehensive Income (Loss). We have not reached a settlement with respect to the NordicTrack infringing products and we intend to enforce this litigation and to pursue our related patent infringement claims against them.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
RESULTS OF OPERATIONS – Pay-TV Segment
Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022.
| | | | | | | | | | | | |
| | For the Three Months Ended | | | | | | | ||||
| | September 30, | | Variance | | |||||||
Statements of Operations Data |
| 2023 |
| 2022 |
| Amount |
| % |
| |||
| | (In thousands) | | | | |||||||
Revenue: | | | | | | | | | | | | |
Service revenue | | $ | 2,774,875 | | $ | 3,037,279 | | $ | (262,404) | | (8.6) | |
Equipment sales and other revenue | | | 32,226 | | | 41,139 | | | (8,913) | | (21.7) | |
Total revenue | | | 2,807,101 | | | 3,078,418 | | | (271,317) | | (8.8) | |
| | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | |
Cost of services | | | 1,715,873 | | | 1,869,731 | | | (153,858) | | (8.2) | |
% of Service revenue | | | 61.8 | % | 61.6 | % | | | | | ||
Cost of sales - equipment and other | | | 30,027 | | | 28,157 | | | 1,870 | | 6.6 | |
Selling, general and administrative expenses | | | 385,636 | | 426,928 | | (41,292) | | (9.7) | | ||
% of Total revenue | | | 13.7 | % | 13.9 | % | | | | | ||
Depreciation and amortization | | | 86,100 | | | 105,948 | | | (19,848) | | (18.7) | |
Total costs and expenses | | | 2,217,636 | | | 2,430,764 | | | (213,128) | | (8.8) | |
| | | | | | | | | | | | |
Operating income (loss) | | $ | 589,465 | | $ | 647,654 | | $ | (58,189) | | (9.0) | |
| | | | | | | | | | | | |
Other data: | | | | | | | | | | | | |
Pay-TV subscribers, as of period end (in millions) | | | 8.840 | | | 10.018 | | | (1.178) | | (11.8) | |
DISH TV subscribers, as of period end (in millions) | | | 6.720 | | | 7.607 | | | (0.887) | | (11.7) | |
SLING TV subscribers, as of period end (in millions) | | | 2.120 | | | 2.411 | | | (0.291) | | (12.1) | |
Pay-TV subscriber additions (losses), net (in millions) | | | (0.064) | | | 0.030 | | | (0.094) | | * | |
DISH TV subscriber additions (losses), net (in millions) | | | (0.181) | | | (0.184) | | | 0.003 | | 1.6 | |
SLING TV subscriber additions (losses), net (in millions) | | | 0.117 | | | 0.214 | | | (0.097) | | (45.3) | |
Pay-TV ARPU | | $ | 105.25 | | $ | 102.07 | | $ | 3.18 | | 3.1 | |
DISH TV subscriber additions, gross (in millions) | | | 0.142 | | | 0.170 | | | (0.028) | | (16.5) | |
DISH TV churn rate | | | 1.58 | % | 1.53 | % | 0.05 | % | 3.3 | | ||
DISH TV SAC | | $ | 1,065 | | $ | 1,029 | | $ | 36 | | 3.5 | |
Purchases of property and equipment | | $ | 64,331 | | $ | 28,103 | | $ | 36,228 | | * | |
OIBDA | | $ | 675,565 | | $ | 753,602 | | $ | (78,037) | | (10.4) | |
| | | | | | | | | | | | |
* Percentage is not meaningful.
Pay-TV Subscribers
DISH TV subscribers. We lost approximately 181,000 net DISH TV subscribers during the three months ended September 30, 2023 compared to the loss of approximately 184,000 net DISH TV subscribers during the same period in 2022. This decrease in net DISH TV subscriber losses primarily resulted from lower DISH TV subscriber disconnects in 2023, partially offset by lower gross new DISH TV subscriber activations.
SLING TV subscribers. We added approximately 117,000 net SLING TV subscribers during the three months ended September 30, 2023 compared to the addition of approximately 214,000 net SLING TV subscribers during the same period in 2022. The decrease in net SLING TV subscriber additions was primarily related to lower SLING TV subscriber activations and higher SLING TV subscriber disconnects in 2023. We continue to experience increased competition, including competition from other subscription video on-demand and live-linear OTT service providers, many of which are providers of our content and offer football and other seasonal sports programming direct to subscribers on an a la carte basis.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
DISH TV subscribers, gross. During the three months ended September 30, 2023, we activated approximately 142,000 gross new DISH TV subscribers compared to approximately 170,000 gross new DISH TV subscribers during the same period in 2022, a decrease of 16.5%. This decrease in our gross new DISH TV subscriber activations was primarily related to the lack of demand and shifting consumer behavior, as well as increased competitive pressures, including, but not limited to, live-linear OTT service providers, aggressive short term introductory pricing and bundled offers combining broadband, video and/or wireless services and other discounted promotional offers, and direct-to-consumer offerings by certain of our programmers. Our gross new DISH TV subscriber activations continue to be negatively impacted by an emphasis on acquiring higher quality subscribers.
DISH TV churn rate. Our DISH TV churn rate for the three months ended September 30, 2023 was 1.58% compared to 1.53% for the same period in 2022. Our DISH TV churn rate continues to be adversely impacted by external factors, such as, among other things, cord cutting, shifting consumer behavior and increased competitive pressures, including, but not limited to, live-linear OTT service providers, aggressive marketing, bundled discount offers combining broadband, video and/or wireless services and other discounted promotional offers. Our DISH TV churn rate continues to be positively impacted by our emphasis on acquiring and retaining higher quality subscribers. Our DISH TV churn rate is also impacted by internal factors, such as, among other things, our ability to consistently provide outstanding customer service, price increases, our ability to control piracy and other forms of fraud, and the level of our retention efforts.
Our net Pay-TV subscriber additions, gross new DISH TV subscriber activations, and DISH TV churn rate have been negatively impacted as a result of programming interruptions and threatened programming interruptions in connection with the scheduled expiration of programming carriage contracts with content providers. We cannot predict with any certainty the impact to our net Pay-TV subscriber additions, gross new DISH TV subscriber activations, and DISH TV subscriber churn rate resulting from programming interruptions or threatened programming interruptions that may occur in the future. As a result, we may at times suffer from periods of lower net Pay-TV subscriber additions or higher net Pay-TV subscriber losses.
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 independent third-party retailers and installers to provide high-quality service. Most of these factors have affected both gross new DISH TV subscriber activations as well as DISH TV subscriber churn rate. Our future gross new DISH TV subscriber activations and our DISH TV subscriber churn rate may be negatively impacted by these factors, which could in turn adversely affect our revenue.
Service revenue. “Service revenue” totaled $2.775 billion for the three months ended September 30, 2023, a decrease of $262 million or 8.6% compared to the same period in 2022. The decrease in “Service revenue” compared to the same period in 2022 was primarily related to lower average Pay-TV subscriber base, partially offset by an increase in Pay-TV ARPU, discussed below.
Pay-TV ARPU. Pay-TV ARPU was $105.25 during the three months ended September 30, 2023 versus $102.07 during the same period in 2022. The $3.18 or 3.1% increase in Pay-TV ARPU was primarily attributable to the DISH TV and SLING TV programming price increases. The DISH TV and SLING TV programming package price increases were effective in the fourth quarter of 2022.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Cost of services. “Cost of services” totaled $1.716 billion during the three months ended September 30, 2023, a decrease of $154 million or 8.2% compared to the same period in 2022. The decrease in “Cost of services” was primarily attributable to a lower average Pay-TV subscriber base and lower variable and retention costs per subscriber, partially offset by higher programming costs per subscriber. In addition, programming costs per subscriber increased during the three months ended September 30, 2023 due to rate increases in certain of our programming contracts, including the renewal of certain contracts at higher rates, particularly for local broadcast channels. “Cost of services” represented 61.8% and 61.6% of “Service revenue” during the three months ended September 30, 2023 and 2022, respectively.
In the normal course of business, we enter into contracts to purchase programming content in which our payment obligations are generally contingent on the number of Pay-TV subscribers to whom we provide the respective content. Our “Cost of services” have and will continue to face further upward pressure from price increases and the renewal of long-term programming contracts on less favorable pricing terms. In addition, our programming expenses will increase to the extent we are successful in growing our Pay-TV subscriber base.
Selling, general and administrative expenses. “Selling, general and administrative expenses” totaled $386 million during the three months ended September 30, 2023, a $41 million or 9.7% decrease compared to the same period in 2022. This change was primarily driven by lower marketing expenditures and a decrease in personnel costs, partially offset by Merger related costs.
Depreciation and amortization. “Depreciation and amortization” expense totaled $86 million during the three months ended September 30, 2023, a $20 million or 18.7% decrease compared to the same period in 2022. This change was primarily driven by a decrease in depreciation expense from equipment leased to new and existing DISH TV subscribers and the EchoStar XI satellite which became fully depreciated during the second quarter of 2023.
DISH TV SAC. DISH TV SAC was $1,065 during the three months ended September 30, 2023 compared to $1,029 during the same period in 2022, an increase of $36 or 3.5%. This change was primarily attributable to higher installation costs due to an increase in labor and other installation costs, and a lower percentage of remanufactured receivers being activated on new subscriber accounts, partially offset by a decrease in advertising costs per subscriber. In addition, the three months ended September 30, 2023 was negatively impacted by fewer commercial additions compared to the same period in 2022. Commercial activations historically have lower DISH TV SAC than residential activations, and therefore the decrease in commercial activations had a negative impact on DISH TV SAC for the three months ended September 30, 2023.
During the three months ended September 30, 2023 and 2022, the amount of equipment capitalized under our lease program for new DISH TV subscribers totaled $16 million and $12 million, respectively. This increase in capital expenditures resulted from a lower percentage of remanufactured receivers being activated on new subscriber accounts.
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 DISH TV SAC reduction associated with redeployment of that returned lease equipment.
Our “DISH TV SAC” may materially increase in the future to the extent that we, among other things, transition to newer technologies, introduce more aggressive promotions, or provide greater equipment subsidies. See further information under “Liquidity and Capital Resources – Subscriber Acquisition and Retention Costs.”
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022.
| | | | | | | | | | | | |
| | For the Nine Months Ended | | | | |||||||
| | September 30, | | Variance | | |||||||
Statements of Operations Data |
| 2023 |
| 2022 |
| Amount |
| % |
| |||
| | (In thousands) | | | | |||||||
Revenue: | | | | | | | | | | | | |
Service revenue | | $ | 8,586,009 | | $ | 9,280,621 | | $ | (694,612) | | (7.5) | |
Equipment sales and other revenue | | | 168,363 | | | 118,623 | | | 49,740 | | 41.9 | |
Total revenue | | | 8,754,372 | | | 9,399,244 | | | (644,872) | | (6.9) | |
| | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | |
Cost of services | | | 5,298,196 | | | 5,595,883 | | | (297,687) | | (5.3) | |
% of Service revenue | | | 61.7 | % | 60.3 | % | | | | | ||
Cost of sales - equipment and other | | | 75,800 | | | 80,598 | | | (4,798) | | (6.0) | |
Selling, general and administrative expenses | | | 1,108,738 | | 1,209,519 | | (100,781) | | (8.3) | | ||
% of Total revenue | | | 12.7 | % | 12.9 | % | | | | | ||
Depreciation and amortization | | | 286,148 | | | 328,073 | | | (41,925) | | (12.8) | |
Total costs and expenses | | | 6,768,882 | | | 7,214,073 | | | (445,191) | | (6.2) | |
| | | | | | | | | | | | |
Operating income (loss) | | $ | 1,985,490 | | $ | 2,185,171 | | $ | (199,681) | | (9.1) | |
| | | | | | | | | | | | |
Other data: | | | | | | | | | | | | |
Pay-TV subscribers, as of period end (in millions) | | | 8.840 | | | 10.018 | | | (1.178) | | (11.8) | |
DISH TV subscribers, as of period end (in millions) | | | 6.720 | | | 7.607 | | | (0.887) | | (11.7) | |
SLING TV subscribers, as of period end (in millions) | | | 2.120 | | | 2.411 | | | (0.291) | | (12.1) | |
Pay-TV subscriber additions (losses), net (in millions) | | | (0.910) | | | (0.689) | | | (0.221) | | (32.1) | |
DISH TV subscriber additions (losses), net (in millions) | | | (0.696) | | | (0.614) | | | (0.082) | | (13.4) | |
SLING TV subscriber additions (losses), net (in millions) | | | (0.214) | | | (0.075) | | | (0.139) | | * | |
Pay-TV ARPU | | $ | 103.98 | | $ | 100.91 | | $ | 3.07 | | 3.0 | |
DISH TV subscriber additions, gross (in millions) | | | 0.375 | | | 0.485 | | | (0.110) | | (22.7) | |
DISH TV churn rate | | | 1.69 | % | 1.55 | % | 0.14 | % | 9.0 | | ||
DISH TV SAC | | $ | 1,095 | | $ | 1,033 | | $ | 62 | | 6.0 | |
Purchases of property and equipment | | $ | 167,524 | | $ | 91,358 | | $ | 76,166 | | 83.4 | |
OIBDA | | $ | 2,271,638 | | $ | 2,513,244 | | $ | (241,606) | | (9.6) | |
| | | | | | | | | | | | |
* Percentage is not meaningful.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Pay-TV Subscribers
DISH TV subscribers. We lost approximately 696,000 net DISH TV subscribers during the nine months ended September 30, 2023 compared to the loss of approximately 614,000 net DISH TV subscribers during the same period in 2022. This increase in net DISH TV subscriber losses primarily resulted from lower gross new DISH TV subscriber activations and a higher DISH TV churn rate.
SLING TV subscribers. We lost approximately 214,000 net SLING TV subscribers during the nine months ended September 30, 2023 compared to the loss of approximately 75,000 net SLING TV subscribers during the same period in 2022. The increase in net SLING TV subscriber losses were primarily related to higher SLING TV subscriber disconnects in 2023, partially offset by higher SLING TV subscriber activations. We continue to experience increased competition, including competition from other subscription video on-demand and live-linear OTT service providers, many of which are providers of our content and offer football and other seasonal sports programming direct to subscribers on an a la carte basis.
DISH TV subscribers, gross. During the nine months ended September 30, 2023, we activated approximately 375,000 gross new DISH TV subscribers compared to approximately 485,000 gross new DISH TV subscribers during the same period in 2022, a decrease of 22.7%. This decrease in our gross new DISH TV subscriber activations was primarily related to the lack of demand, shifting consumer behavior, and lower marketing expenditures, as well as increased competitive pressures, including, but not limited to, live-linear OTT service providers, aggressive short term introductory pricing and bundled offers combining broadband, video and/or wireless services and other discounted promotional offers, and direct-to-consumer offerings by certain of our programmers. Our gross new DISH TV subscriber activations continue to be negatively impacted by an emphasis on acquiring higher quality subscribers.
DISH TV churn rate. Our DISH TV churn rate for the nine months ended September 30, 2023 was 1.69% compared to 1.55% for the same period in 2022. Our DISH TV churn rate for the nine months ended September 30, 2023 was briefly elevated due to the cyber-security incident. Our DISH TV churn rate continues to be adversely impacted by external factors, such as, among other things, cord cutting, shifting consumer behavior and increased competitive pressures, including, but not limited to, live-linear OTT service providers, aggressive marketing, bundled discount offers combining broadband, video and/or wireless services and other discounted promotional offers. Our DISH TV churn rate continues to be positively impacted by our emphasis on acquiring and retaining higher quality subscribers. Our DISH TV churn rate is also impacted by internal factors, such as, among other things, our ability to consistently provide outstanding customer service, price increases, our ability to control piracy and other forms of fraud, and the level of our retention efforts.
Our net Pay-TV subscriber additions, gross new DISH TV subscriber activations, and DISH TV churn rate have been negatively impacted as a result of programming interruptions and threatened programming interruptions in connection with the scheduled expiration of programming carriage contracts with content providers. We cannot predict with any certainty the impact to our net Pay-TV subscriber additions, gross new DISH TV subscriber activations, and DISH TV subscriber churn rate resulting from programming interruptions or threatened programming interruptions that may occur in the future. As a result, we may at times suffer from periods of lower net Pay-TV subscriber additions or higher net Pay-TV subscriber losses.
Service revenue. “Service revenue” totaled $8.586 billion for the nine months ended September 30, 2023, a decrease of $695 million or 7.5% compared to the same period in 2022. The decrease in “Service revenue” compared to the same period in 2022 was primarily related to lower average Pay-TV subscriber base, partially offset by an increase in Pay-TV ARPU, discussed below.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Equipment sales and other revenue. “Equipment sales and other revenue” totaled $168 million for the nine months ended September 30, 2023, an increase of $50 million or 41.9% compared to the same period in 2022. The increase in “Equipment sales and other revenue” compared to the same period in 2022 was primarily related to a non-recurring $75 million license of our Adaptive Bitrate Streaming patents to Peloton covering certain Peloton products that resolves our litigation involving those products.
Pay-TV ARPU. Pay-TV ARPU was $103.98 during the nine months ended September 30, 2023 versus $100.91 during the same period in 2022. The $3.07 or 3.0% increase in Pay-TV ARPU was primarily attributable to the DISH TV and SLING TV programming price increases. The DISH TV and SLING TV programming package price increases were effective in the fourth quarter of 2022.
Cost of services. “Cost of services” totaled $5.298 billion during the nine months ended September 30, 2023, a decrease of $298 million or 5.3% compared to the same period in 2022. The decrease in “Cost of services” was primarily attributable to a lower average Pay-TV subscriber base, partially offset by higher programming costs per subscriber and higher variable and retention costs per subscriber. Programming costs per subscriber increased during the nine months ended September 30, 2023 due to rate increases in certain of our programming contracts, including the renewal of certain contracts at higher rates, particularly for local broadcast channels. In addition, variable and retention costs per subscriber increased during the nine months ended September 30, 2023 due to, among other things, approximately $30 million in cyber-security-related expenses to remediate the incident and provide additional customer support. “Cost of services” represented 61.7% and 60.3% of “Service revenue” during the nine months ended September 30, 2023 and 2022, respectively.
Selling, general and administrative expenses. “Selling, general and administrative expenses” totaled $1.109 billion during the nine months ended September 30, 2023, a $101 million or 8.3% decrease compared to the same period in 2022. This change was primarily driven by a decrease in subscriber acquisition costs resulting from lower marketing expenditures and lower gross new DISH TV subscriber activations, and a decrease in personnel costs, partially offset by Merger related costs.
Depreciation and amortization. “Depreciation and amortization” expense totaled $286 million during the nine months ended September 30, 2023, a $42 million or 12.8% decrease compared to the same period in 2022. This change was primarily driven by a decrease in depreciation expense from equipment leased to new and existing DISH TV subscribers, the EchoStar XI satellite which became fully depreciated during the second quarter of 2023.
DISH TV SAC. DISH TV SAC was $1,095 during the nine months ended September 30, 2023 compared to $1,033 during the same period in 2022, an increase of $62 or 6.0%. This change was primarily attributable to an increase in advertising costs per subscriber, higher installation costs due to an increase in labor and other installation costs, and a lower percentage of remanufactured receivers being activated on new subscriber accounts.
During the nine months ended September 30, 2023 and 2022, the amount of equipment capitalized under our lease program for new DISH TV subscribers totaled $43 million and $39 million, respectively. This increase in capital expenditures resulted from a lower percentage of remanufactured receivers being activated on new subscriber accounts.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Wireless Segment
Our Wireless business segment consists of two business units, Retail Wireless and 5G Network Deployment. Revenue and operating income (loss) by business unit are shown in the table below:
| | | | | | | | | | | | | |
For the Three Months Ended September 30, 2023 | | | Retail Wireless | | | 5G Network Deployment | | | Eliminations | | | Total Wireless | |
| | (In thousands) | | ||||||||||
Total revenue | | $ | 890,980 | | $ | 29,916 | | $ | (20,594) | | $ | 900,302 | |
Operating income (loss) | | $ | (168,166) | | $ | (463,105) | | $ | — | | $ | (631,271) | |
| | | | | | | | | | | | | |
For the Three Months Ended September 30, 2022 | | | Retail Wireless | | | 5G Network Deployment | | | Eliminations | | | Total Wireless | |
| | (In thousands) | | ||||||||||
Total revenue | | $ | 1,007,423 | | $ | 16,573 | | $ | (5,864) | | $ | 1,018,132 | |
Operating income (loss) | | $ | (8,032) | | $ | (212,593) | | $ | — | | $ | (220,625) | |
| | | | | | | | | | | | | |
For the three months ended September 30, 2023 and 2022, total purchases of property and equipment (excluding capitalized interest related to FCC authorizations) for our Wireless segment were $686 million and $517 million, respectively. This increase primarily resulted from capital expenditures related to our 5G Network Deployment.
| | | | | | | | | | | | | |
For the Nine Months Ended September 30, 2023 | | | Retail Wireless | | | 5G Network Deployment | | | Eliminations | | | Total Wireless | |
| | (In thousands) | | ||||||||||
Total revenue | | $ | 2,794,087 | | $ | 67,902 | | $ | (37,439) | | $ | 2,824,550 | |
Operating income (loss) | | $ | (298,872) | | $ | (1,198,667) | | $ | — | | $ | (1,497,539) | |
| | | | | | | | | | | | | |
For the Nine Months Ended September 30, 2022 | | | Retail Wireless | | | 5G Network Deployment | | | Eliminations | | | Total Wireless | |
| | (In thousands) | | ||||||||||
Total revenue | | $ | 3,207,034 | | $ | 48,362 | | $ | (13,806) | | $ | 3,241,590 | |
Operating income (loss) | | $ | 41,160 | | $ | (556,007) | | $ | — | | $ | (514,847) | |
For the nine months ended September 30, 2023 and 2022, total purchases of property and equipment (excluding capitalized interest related to FCC authorizations) for our Wireless segment were $2.159 billion and $1.740 billion, respectively. This increase primarily resulted from capital expenditures related to our 5G Network Deployment.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Wireless – Retail Wireless
We offer nationwide prepaid and postpaid Retail Wireless services to subscribers primarily under our Boost Mobile, Boost Infinite and Gen Mobile brands, as well as a competitive portfolio of wireless devices. Prepaid wireless subscribers generally pay in advance for monthly access to wireless talk, text, and data services. Postpaid wireless subscribers are qualified to pay after receiving wireless talk, text, and data services.
Boost Infinite. In the fourth quarter of 2022, we launched Boost Infinite, a postpaid wireless service, to a limited number of customers who had signed up for early registration. During 2023, we launched our nationwide expansion of Boost Infinite, and at the end of the third quarter of 2023, we began offering the iPhone 15 on our 5G Network and expanded our Boost Infinite offering through a distribution partnership with Amazon.
We are currently operating our Retail Wireless business unit primarily as an MVNO as we continue our 5G Network Deployment and commercialize our 5G Network. We are transitioning our Retail Wireless business unit to an MNO as our 5G Network becomes commercially available and we are currently activating subscribers onto our 5G Network. As an MVNO, today we depend on T-Mobile and AT&T to provide us with network services under MNSA and NSA, respectively. Under the NSA, we expect AT&T will become our primary network services provider.
Historically, a portion of our Wireless subscribers received services through T-Mobile’s CDMA Network. However, T-Mobile previously provided notice that it intended to shutdown the CDMA Network on March 31, 2022. The shutdown began on March 31, 2022 and was completed during the second quarter of 2022. While we worked to mitigate the harms of this shutdown, we incurred significant costs to migrate subscribers on this timeline. We implemented targeted efforts and promotions directed at impacted customers, which resulted in the successful migration of the vast majority of our CDMA subscribers. The CDMA shutdown negatively impacted our gross new Wireless subscriber activations, our Wireless churn rate, and our results of operations during the first and second quarters of 2022. During the second quarter of 2022, we removed approximately 126,000 subscribers from our ending Wireless subscriber count representing Wireless subscribers who did not migrate off the CDMA network prior to the shutdown. The effect of the removal of the 126,000 subscribers was excluded from the calculation of our net Wireless subscriber additions/losses and Wireless churn rate.
On June 21, 2022, we and T-Mobile signed an amendment to the MNSA. In connection with this amendment, T-Mobile agreed to transfer to us (subject to required regulatory approvals) all Boost branded customers of former Sprint affiliates, Shentel and Swiftel, as well as Boost branded customers who were previously part of the California Public Utilities Commission CARE program (the “Boost Affiliate Subscribers”). We received regulatory approvals and on September 1, 2022 closed the transfer, upon which we received approximately 139,000 Boost Affiliate Subscribers. In addition, this amendment, among other things, settled all open disputes, including CDMA matters, with terms providing improved pricing and enhanced roaming solutions for our consumers. Prior to the signing of this agreement, the first and second quarters of 2022 were adversely impacted by, among other things, our CDMA migration costs and our ability to launch more competitive service plans in the marketplace. As a result, during the first and second quarters of 2022, we experienced lower gross new Wireless subscriber activations and higher Wireless churn.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
During the second half of 2022, we began the process of migrating subscribers off the Transition Services Agreement (“TSA”) with T-Mobile, including the billing systems, and onto our own billing and operational support systems. The migration of subscribers to our new billing and operational support systems accelerated during the fourth quarter of 2022 and continued in the first and second quarters of 2023. The migration of subscribers during the first and second quarters of 2023 negatively impacted our Wireless churn rate and our results of operations. During the second quarter of 2023, we completed the migration of subscribers off the TSA with T-Mobile and onto our own billing and operational support systems. As of September 30, 2023, we had 7.500 million Wireless subscribers. Currently, we offer Wireless subscribers competitive consumer plans with no annual service contracts and monthly service plans including high-speed data and unlimited talk and text.
Other Developments
We regularly evaluate ways to enhance our business. As part of this process, we are in regular dialogue with interested parties who may assist us in accomplishing our goals, including ongoing conversations with CONX Corp. (an entity partially owned by Charles W. Ergen, our Chairman) regarding a transaction involving our Retail Wireless business unit. There can be no assurance that these discussions will lead to a transaction nor as to the structure or terms of any such transaction.
Competition
Retail wireless is a mature market with moderate year over year organic growth. Competitors include, among others, providers who offer similar communication services, such as talk, text and data. Competitive factors within the wireless communications services industry include, but are not limited to, pricing, market saturation, service and product offerings, customer experience and service quality. We compete with a number of national wireless carriers, including Verizon, AT&T and T-Mobile, all of which are significantly larger than us, serve a significant percentage of all wireless subscribers and enjoy scale advantages compared to us. Verizon, AT&T, and T-Mobile are currently the only nationwide MNOs in the United States.
Primary competitors to our Retail Wireless business unit include, but are not limited to, Metro PCS (owned by T-Mobile), Cricket Wireless (owned by AT&T), Visible (owned by Verizon), Tracfone Wireless (owned by Verizon), and other MVNOs such as Consumer Cellular, Mint Mobile (T-Mobile has reached an agreement to acquire) and Xfinity Mobile.
Wireless – 5G Network Deployment
We have invested a total of over $30 billion in Wireless spectrum licenses, which includes over $10 billion in noncontrolling investments in certain entities. The $30 billion of investments related to Wireless spectrum licenses does not include $8 billion of capitalized interest related to the carrying value of such licenses. See Note 2 and Note 10 in the Notes to our Condensed Consolidated Financial Statements for further information.
We will need to raise additional capital in the future, which may not be available on favorable terms, to fund the efforts described below, as well as, among other things, make any potential Northstar Re-Auction Payment. There can be no assurance that we and/or the SNR Entities will be able to profitably deploy these Wireless spectrum licenses, which may affect the carrying amount of these assets and our future financial condition or results of operations. See Note 10 in the Notes to our Condensed Consolidated Financial Statements for further information.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
DISH Network Spectrum
We have invested a total of over $30 billion to acquire certain Wireless spectrum licenses. These Wireless spectrum licenses are subject to certain interim and final build-out requirements, as well as certain renewal requirements. We plan to commercialize our Wireless spectrum licenses through our 5G Network Deployment. We have committed to deploy our 5G Network capable of serving increasingly larger portions of the U.S. population at different deadlines, including 20% of the U.S. population by June 2022 and 70% of the U.S. population by June 2023. If by June 2023, we are offering 5G broadband service to at least 50% of the U.S. population but less than 70% of the U.S. population, the 70% June 2023 deadline will be extended automatically to June 2025; however, as a result, we may, under certain circumstances, potentially be subject to certain penalties. On June 14, 2022, we announced we had successfully reached our 20% population coverage requirement. In addition, we announced and certified to the FCC that as of June 14, 2023, we offer 5G broadband service to over 73% of the U.S. population, or more than 246 million Americans nationwide, and have deployed over 16,000 5G cell sites. On September 29, 2023, the FCC confirmed we have met all of our June 14, 2023 band-specific 5G deployment commitments, and two of our three nationwide 5G commitments. The single remaining 5G commitment, that at least 70% of the U.S. population has access to average download speeds equal to 35 Mbps, will be confirmed using the drive test methodology agreed to and approved by the FCC. We have six months from September 29, 2023 to complete this drive test. We now have the largest commercial deployment of 5G VoNR in the world, reaching more than 100 million Americans in over 60 markets, and we are launching new markets every month. As a result of us providing 5G broadband service to over 50% of the U.S. population by June 14, 2023, the final build-out deadlines have been extended automatically to June 14, 2025 for us to offer 5G broadband service to at least 70% of the population in each Economic Area for the 700 MHz Licenses and AWS-4 Licenses and at least 75% of the population in each Economic Area for the H Block Licenses.
We may need to make significant additional investments or partner with others to, among other things, continue our 5G Network Deployment and further commercialize, build-out and integrate these licenses and related assets and any additional acquired licenses and related assets, as well as to comply with regulations applicable to such licenses. Depending on the nature and scope of such activities, any such investments or partnerships could vary significantly. In addition, as we continue our 5G Network Deployment, we have and may continue to incur significant additional expenses related to, among other things, research and development, wireless testing and ongoing upgrades to the wireless network infrastructure, software and third-party integration. As a result of these investments, among other factors, we plan to raise additional capital, which may not be available on favorable terms. We may also determine that additional wireless spectrum licenses may be required for our 5G Network Deployment and to compete effectively with other wireless service providers. See Note 9 and Note 10 for further information in the Notes to our Condensed Consolidated Financial Statements for further information.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
DISH Network Noncontrolling Investments in the Northstar Entities and the SNR Entities Related to AWS-3 Wireless Spectrum Licenses
During 2015, through our wholly-owned subsidiaries American AWS-3 Wireless II L.L.C. (“American II”) and American AWS-3 Wireless III L.L.C. (“American III”), we initially made over $10 billion in certain noncontrolling investments in Northstar Spectrum, LLC (“Northstar Spectrum”), the parent company of Northstar Wireless, L.L.C. (“Northstar Wireless,” and collectively with Northstar Spectrum, the “Northstar Entities”), and in SNR Wireless HoldCo, LLC (“SNR HoldCo”), the parent company of SNR Wireless LicenseCo, LLC (“SNR Wireless,” and collectively with SNR HoldCo, the “SNR Entities”), respectively. On October 27, 2015, the FCC granted certain AWS-3 wireless spectrum licenses (the “AWS-3 Licenses”) to Northstar Wireless and to SNR Wireless, respectively, which are recorded in “FCC authorizations” on our Condensed Consolidated Balance Sheets. Under the applicable accounting guidance in Accounting Standards Codification 810, Consolidation (“ASC 810”), Northstar Spectrum and SNR HoldCo are considered variable interest entities (“VIEs”) and, based on the characteristics of the structure of these entities and in accordance with the applicable accounting guidance, we consolidate these entities into our financial statements. Subsequent to September 30, 2023, the FCC consented to the sale of Northstar Manager, LLC’s (“Northstar Manager”) ownership interests in Northstar Spectrum, which we purchased for a total of approximately $109 million on October 12, 2023. This purchase resulted in the elimination of all of our redeemable noncontrolling interest as it related to Northstar Spectrum as of the purchase date and we continue to consolidate the Northstar Entities as wholly-owned subsidiaries. See Note 2 in the Notes to our Condensed Consolidated Financial Statements for further information.
The AWS-3 Licenses are subject to certain interim and final build-out requirements, as well as certain renewal requirements. The SNR Entities may need to raise significant additional capital in the future, which may be obtained from third-party sources or from us, so that the SNR Entities may commercialize, build-out and integrate these AWS-3 Licenses, comply with regulations applicable to such AWS-3 Licenses, and make any potential SNR Re-Auction Payment for the AWS-3 licenses retained by the FCC. Depending upon the nature and scope of such commercialization, build-out and integration efforts, regulatory compliance, and potential SNR Re-Auction Payment, any loans, equity contributions or partnerships could vary significantly. There can be no assurance that we will be able to obtain a profitable return on our noncontrolling investment in the SNR Entities.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
RESULTS OF OPERATIONS – Wireless Segment – Retail Wireless Business Unit
Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022.
| | | | | | | | | | | | |
| | For the Three Months Ended | | | | | | | ||||
| | September 30, | | Variance | | |||||||
Statements of Operations Data |
| 2023 | 2022 |
| Amount |
| % |
| ||||
| | (In thousands) | | | | |||||||
Revenue: | | | | | | | | | | | | |
Service revenue | | $ | 814,267 | | $ | 892,820 | | $ | (78,553) | | (8.8) | |
Equipment sales and other revenue | | | 76,713 | | | 114,603 | | | (37,890) | | (33.1) | |
Total revenue | | | 890,980 | | | 1,007,423 | | | (116,443) | | (11.6) | |
| | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | |
Cost of services | | | 525,130 | | | 512,605 | | | 12,525 | | 2.4 | |
% of Service revenue | | | 64.5 | % | 57.4 | % | | | | | ||
Cost of sales - equipment and other | | | 279,914 | | | 281,249 | | | (1,335) | | (0.5) | |
Selling, general and administrative expenses | | | 191,553 | | | 178,197 | | 13,356 | | 7.5 | | |
% of Total revenue | | | 21.5 | % | 17.7 | % | | | | | ||
Depreciation and amortization | | | 62,549 | | | 43,404 | | | 19,145 | | 44.1 | |
Total costs and expenses | | | 1,059,146 | | | 1,015,455 | | | 43,691 | | 4.3 | |
| | | | | | | | | | | | |
Operating income (loss) | | $ | (168,166) | | $ | (8,032) | | $ | (160,134) | | * | |
| | | | | | | | | | | | |
Other data: | | | | | | | | | | | | |
Wireless subscribers, as of period end (in millions) ** | | | 7.500 | | | 8.007 | | | (0.507) | | (6.3) | |
Wireless subscriber additions, gross (in millions) | | | 0.638 | | | 0.891 | | | (0.253) | | (28.4) | |
Wireless subscriber additions (losses), net (in millions) *** | | | (0.225) | | | 0.001 | | | (0.226) | | * | |
Wireless ARPU | | $ | 35.74 | | $ | 37.64 | | $ | (1.90) | | (5.0) | |
Wireless churn rate | | | 4.21 | % | 4.28 | % | (0.07) | % | (1.6) | | ||
OIBDA | | $ | (105,617) | | $ | 35,372 | | $ | (140,989) | | * | |
| | | | | | | | | | | | |
* Percentage is not meaningful.
**During the second quarter of 2022, we removed approximately 126,000 subscribers from our ending Wireless subscriber count representing Wireless subscribers who did not migrate off the CDMA network prior to the shutdown. The effect of the removal of the 126,000 Wireless subscribers was excluded from the calculation of our net Wireless subscriber additions/losses and Wireless churn rate. See “Wireless – Retail Wireless” for further information on the CDMA shutdown. In addition, during the third quarter of 2022, approximately 139,000 Boost Affiliate Subscribers were transferred to us and are included in our ending Wireless subscriber count and excluded from our gross new Wireless subscriber activations. See “Wireless – Retail Wireless” for further information on the amended MNSA.
***Includes ACP/Gen Mobile subscribers.
Wireless subscribers. We lost approximately 225,000 net Wireless subscribers during the three months ended September 30, 2023 compared to the addition of approximately 1,000 net Wireless subscribers during the same period in 2022. The decrease in net Wireless subscribers primarily resulted from lower gross new Wireless subscriber activations and a decrease in net ACP/Gen Mobile subscriber additions, partially offset by a lower Wireless churn rate.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Wireless subscribers, gross. During the three months ended September 30, 2023, we activated approximately 638,000 gross new Wireless subscribers compared to approximately 891,000 gross new Wireless subscribers during the same period in 2022, a decrease of 28.4%. This decrease in our gross new Wireless subscriber activations was primarily related to increased competitive pressures, including aggressive competitor marketing, discounted service plans and deeper wireless device subsidies. In addition, our gross new Wireless subscribers for the three months ended September 30, 2023 was negatively impacted by our emphasis on acquiring and retaining higher quality subscribers.
Wireless churn rate. Our Wireless churn rate for the three months ended September 30, 2023 was 4.21% compared to 4.28% for the same period in 2022. Our Wireless churn rate for the three months ended September 30, 2023 was positively impacted by our emphasis on acquiring and retaining higher quality subscribers, partially offset by competitive pressures, including deeper wireless device subsidies.
Service revenue. “Service revenue” totaled $814 million for the three months ended September 30, 2023, a decrease of $79 million or 8.8% compared to the same period in 2022. The decrease in “Service revenue” compared to the same period in 2022 was primarily related to a decrease in Wireless ARPU and a lower average Wireless subscriber base, discussed below.
Wireless ARPU. Wireless ARPU was $35.74 during the three months ended September 30, 2023 versus $37.64 during the same period in 2022. The $1.90 or 5.0% decrease in Wireless ARPU was primarily attributable to, among other things, a shift in subscriber plan mix to lower priced service plans.
Equipment sales and other revenue. “Equipment sales and other revenue” totaled $77 million for the three months ended September 30, 2023, a decrease of $38 million or 33.1% compared to the same period in 2022. The decrease in “Equipment sales and other revenue” compared to the same period in 2022 was due to a decrease in units shipped and higher promotional subsidies.
Cost of services. “Cost of services” totaled $525 million for the three months ended September 30, 2023, an increase of $13 million or 2.4% compared to the same period in 2022. The increase in “Cost of services” compared to the same period in 2022 was primarily attributable to higher monthly dealer incentive costs, partially offset by a lower average Wireless subscriber base. During the three months ended September 30, 2023, we realigned our commission structure with current business objectives to acquire higher quality, long-term subscribers, which resulted in elevated costs during the transition period.
Cost of sales – equipment and other. “Cost of sales – equipment and other” totaled $280 million for the three months ended September 30, 2023, a decrease of $1 million or 0.5% compared to the same period in 2022. The decrease in “Cost of sales – equipment and other” compared to the same period in 2022 was primarily related to a decrease in units shipped, partially offset by higher costs per unit shipped due to unit mix. During the three months ended September 30, 2023, we shipped a higher percentage of devices that are compatible with our 5G Network and other devices that have a higher cost per unit.
Selling, general and administrative expenses. “Selling, general and administrative expenses” totaled $192 million during the three months ended September 30, 2023, a $13 million or 7.5% increase compared to the same period in 2022. This change was primarily driven by higher marketing expenditures, partially offset by a decrease in costs to support the Retail Wireless business unit. The three months ended September 30, 2022 was negatively impacted by costs related to the development of our own billing and operational support systems as we prepared to migrate subscribers off the TSA with T-Mobile.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022.
| | | | | | | | | | | | |
| | For the Nine Months Ended | | | | | | | ||||
| | September 30, | | Variance | | |||||||
Statements of Operations Data |
| 2023 |
| 2022 |
| Amount |
| % | | |||
| | (In thousands) | | | | |||||||
Revenue: | | | | | | | | | | | | |
Service revenue | | $ | 2,535,296 | | $ | 2,754,008 | | $ | (218,712) | | (7.9) | |
Equipment sales and other revenue | | | 258,791 | | | 453,026 | | | (194,235) | | (42.9) | |
Total revenue | | | 2,794,087 | | | 3,207,034 | | | (412,947) | | (12.9) | |
| | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | |
Cost of services | | | 1,537,338 | | | 1,598,124 | | | (60,786) | | (3.8) | |
% of Service revenue | | | 60.6 | % | 58.0 | % | | | | | ||
Cost of sales - equipment and other | | | 822,118 | | | 925,141 | | | (103,023) | | (11.1) | |
Selling, general and administrative expenses | | | 564,906 | | | 515,228 | | 49,678 | | 9.6 | | |
% of Total revenue | | | 20.2 | % | 16.1 | % | | | | | ||
Depreciation and amortization | | | 168,597 | | | 127,381 | | | 41,216 | | 32.4 | |
Total costs and expenses | | | 3,092,959 | | | 3,165,874 | | | (72,915) | | (2.3) | |
| | | | | | | | | | | | |
Operating income (loss) | | $ | (298,872) | | $ | 41,160 | | $ | (340,032) | | * | |
| | | | | | | | | | | | |
Other data: | | | | | | | | | | | | |
Wireless subscribers, as of period end (in millions) ** | | | 7.500 | | | 8.007 | | | (0.507) | | (6.3) | |
Wireless subscriber additions, gross (in millions) | | | 2.134 | | | 2.479 | | | (0.345) | | (13.9) | |
Wireless subscriber additions (losses), net (in millions) *** | | | (0.494) | | | (0.552) | | | 0.058 | | 10.5 | |
Wireless ARPU | | $ | 36.19 | | $ | 37.75 | | $ | (1.56) | | (4.1) | |
Wireless churn rate | | | 4.33 | % | 4.44 | % | (0.11) | % | (2.5) | | ||
OIBDA | | $ | (130,275) | | $ | 168,541 | | $ | (298,816) | | * | |
| | | | | | | | | | | | |
* Percentage is not meaningful.
**During the second quarter of 2022, we removed approximately 126,000 subscribers from our ending Wireless subscriber count representing Wireless subscribers who did not migrate off the CDMA network prior to the shutdown. The effect of the removal of the 126,000 Wireless subscribers was excluded from the calculation of our net Wireless subscriber additions/losses and Wireless churn rate. See “Wireless – Retail Wireless” for further information on the CDMA shutdown. In addition, during the third quarter of 2022, approximately 139,000 Boost Affiliate Subscribers were transferred to us and are included in our ending Wireless subscriber count and excluded from our gross new Wireless subscriber activations. See “Wireless – Retail Wireless” for further information on the amended MNSA.
***Includes ACP/Gen Mobile subscribers.
Wireless subscribers. We lost approximately 494,000 net Wireless subscribers during the nine months ended September 30, 2023 compared to the loss of approximately 552,000 net Wireless subscribers during the same period in 2022. This decrease in net Wireless subscriber losses primarily resulted from an increase in net ACP/Gen Mobile subscriber additions and a lower Wireless churn rate, partially offset by lower gross new Wireless subscriber activations.
Wireless subscribers, gross. During the nine months ended September 30, 2023, we activated approximately 2.134 million gross new Wireless subscribers compared to approximately 2.479 million gross new Wireless subscribers during the same period in 2022, a decrease of 13.9%. This decrease in our gross new Wireless subscriber activations was primarily related to increased competitive pressures, including aggressive competitor marketing, discounted service plans and deeper wireless device subsidies. In addition, our gross new Wireless subscribers for the nine months ended September 30, 2023 was negatively impacted by our emphasis on acquiring and retaining higher quality subscribers.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Wireless churn rate. Our Wireless churn rate for the nine months ended September 30, 2023 was 4.33% compared to 4.44% for the same period in 2022. Our Wireless churn rate for the nine months ended September 30, 2023 was positively impacted by our emphasis on acquiring and retaining higher quality subscribers, partially offset by competitive pressures, including deeper wireless device subsidies. In addition, our Wireless churn rate for the nine months ended September 30, 2023 was negatively impacted by migrating subscribers off the TSA with T-Mobile and onto our new billing and operational support systems. Furthermore, our Wireless churn rate for the nine months ended September 30, 2022 was negatively impacted by the shutdown of the CDMA Network.
Service revenue. “Service revenue” totaled $2.535 billion for the nine months ended September 30, 2023, a decrease of $219 million or 7.9% compared to the same period in 2022. The decrease in “Service revenue” compared to the same period in 2022 was primarily related to a decrease in Wireless ARPU and a lower average Wireless subscriber base, discussed below.
Wireless ARPU. Wireless ARPU was $36.19 during the nine months ended September 30, 2023 versus $37.75 during the same period in 2022. The $1.56 or 4.1% decrease in Wireless ARPU was primarily attributable to, among other things, a shift in subscriber plan mix to lower priced service plans.
Equipment sales and other revenue. “Equipment sales and other revenue” totaled $259 million for the nine months ended September 30, 2023, a decrease of $194 million or 42.9% compared to the same period in 2022. The decrease in “Equipment sales and other revenue” compared to the same period in 2022 was primarily related to a decrease in units shipped and higher promotional subsidies.
Cost of services. “Cost of services” totaled $1.537 billion for the nine months ended September 30, 2023, a decrease of $61 million or 3.8% compared to the same period in 2022. The decrease in “Cost of services” was primarily attributable to a lower average Wireless subscriber base, partially offset by higher monthly dealer incentive costs. During the nine months ended September 30, 2023, we realigned our commission structure with current business objectives to acquire higher quality, long-term subscribers, which resulted in elevated costs during the transition period.
Cost of sales – equipment and other. “Cost of sales – equipment and other” totaled $822 million for the nine months ended September 30, 2023, a decrease of $103 million or 11.1% compared to the same period in 2022. The decrease in “Cost of sales – equipment and other” compared to the same period in 2022 was primarily related to a decrease in units shipped, partially offset by higher costs per unit shipped due to unit mix. During the nine months ended September 30, 2023, we shipped a higher percentage of devices that are compatible with our 5G Network and other devices that have a higher cost per unit.
Selling, general and administrative expenses. “Selling, general and administrative expenses” totaled $565 million during the nine months ended September 30, 2023, a $50 million or 9.6% increase compared to the same period in 2022. This change was primarily driven by higher marketing expenditures, partially offset by a decrease in costs to support the Retail Wireless business unit. The nine months ended September 30, 2022 was negatively impacted by costs related to the development of our own billing and operational support systems as we prepared to migrate subscribers off the TSA with T-Mobile.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
RESULTS OF OPERATIONS – Wireless Segment – 5G Network Deployment Business Unit
Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022.
| | | | | | | | | | | | |
| | For the Three Months Ended | | | | | | | ||||
| | September 30, | | Variance | | |||||||
Statements of Operations Data |
| 2023 |
| 2022 |
| Amount |
| % |
| |||
| | (In thousands) | | | | |||||||
Revenue: | | | | | | | | | | | | |
Equipment sales and other revenue | | $ | 29,916 | | $ | 16,573 | | $ | 13,343 | | 80.5 | |
Total revenue | | | 29,916 | | | 16,573 | | | 13,343 | | 80.5 | |
| | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | |
Cost of sales - equipment and other | | | 260,747 | | | 143,462 | | | 117,285 | | 81.8 | |
Selling, general and administrative expenses | | | 68,315 | | | 54,456 | | | 13,859 | | 25.4 | |
Depreciation and amortization | | | 163,959 | | | 31,248 | | | 132,711 | | * | |
Total costs and expenses | | | 493,021 | | | 229,166 | | | 263,855 | | * | |
| | | | | | | | | | | | |
Operating income (loss) | | $ | (463,105) | | $ | (212,593) | | $ | (250,512) | | * | |
| | | | | | | | | | | | |
Other data: | | | | | | | | | | | | |
OIBDA | | $ | (299,146) | | $ | (181,345) | | $ | (117,801) | | (65.0) | |
| | | | | | | | | | | | |
* Percentage is not meaningful.
Cost of sales – equipment and other. “Cost of sales – equipment and other” totaled $261 million during the three months ended September 30, 2023, an increase of $117 million compared to the same period in 2022. The increase primarily resulted from an increase in lease expense on communication towers, transport, cloud services, and other costs related to our 5G Network.
Selling, general and administrative expenses. “Selling, general and administrative expenses” totaled $68 million during the three months ended September 30, 2023, a $14 million increase compared to the same period in 2022. This change was primarily driven by an increase in costs to support our 5G Network Deployment.
Depreciation and amortization. “Depreciation and amortization” expense totaled $164 million during the three months ended September 30, 2023, a $133 million increase compared to the same period in 2022. This change was primarily driven by an increase in depreciation and amortization expense related to 5G Network Deployment assets being placed in service. We expect our depreciation and amortization expense to increase as we continue to place 5G Network Deployment assets into service.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022.
| | | | | | | | | | | | |
| | For the Nine Months Ended | | | | | | | ||||
| | September 30, | | Variance | | |||||||
Statements of Operations Data |
| 2023 |
| 2022 |
| Amount |
| % | | |||
| | (In thousands) | | | | |||||||
Revenue: | | | | | | | | | | | | |
Equipment sales and other revenue | | $ | 67,902 | | $ | 48,362 | | $ | 19,540 | | 40.4 | |
Total revenue | | | 67,902 | | | 48,362 | | | 19,540 | | 40.4 | |
| | | | | | | | | | | | |
Costs and expenses: | | | | | | | | | | | | |
Cost of sales - equipment and other | | | 671,241 | | | 358,538 | | | 312,703 | | 87.2 | |
Selling, general and administrative expenses | | | 210,258 | | | 168,179 | | | 42,079 | | 25.0 | |
Depreciation and amortization | | | 385,070 | | | 77,652 | | | 307,418 | | * | |
Total costs and expenses | | | 1,266,569 | | | 604,369 | | | 662,200 | | * | |
| | | | | | | | | | | | |
Operating income (loss) | | $ | (1,198,667) | | $ | (556,007) | | $ | (642,660) | | * | |
| | | | | | | | | | | | |
Other data: | | | | | | | | | | | | |
OIBDA | | $ | (813,597) | | $ | (478,355) | | $ | (335,242) | | (70.1) | |
| | | | | | | | | | | | |
* Percentage is not meaningful.
Cost of sales – equipment and other. “Cost of sales – equipment and other” totaled $671 million during the nine months ended September 30, 2023, an increase of $313 million compared to the same period in 2022. The increase primarily resulted from an increase in lease expense on communication towers, transport, cloud services, and other costs related to our 5G Network.
Selling, general and administrative expenses. “Selling, general and administrative expenses” totaled $210 million during the nine months ended September 30, 2023, a $42 million increase compared to the same period in 2022. This change was primarily driven by an increase in costs to support our 5G Network Deployment.
Depreciation and amortization. “Depreciation and amortization” expense totaled $385 million during the nine months ended September 30, 2023, a $307 million increase compared to the same period in 2022. This change was primarily driven by an increase in depreciation and amortization expense related to 5G Network Deployment assets being placed in service. We expect our depreciation and amortization expense to increase as we continue to place 5G Network Deployment assets into service.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
OTHER CONSOLIDATED RESULTS
Three Months Ended September 30, 2023 Compared to the Three Months Ended September 30, 2022.
| | | | | | | | | | | | |
| | For the Three Months Ended | | | | | | | ||||
| | September 30, | | Variance | | |||||||
Statements of Operations Data |
| 2023 |
| 2022 |
| Amount |
| % |
| |||
| | (In thousands) | | | ||||||||
Operating income (loss) | | $ | (41,806) | | $ | 427,029 | | $ | (468,835) | | * | |
| | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | |
Interest income | | | 18,649 | | | 7,632 | | | 11,017 | | * | |
Interest expense, net of amounts capitalized | | | (10,173) | | | (4,848) | | | (5,325) | | * | |
Other, net | | | (151,497) | | | 57,941 | | | (209,438) | | * | |
Total other income (expense) | | | (143,021) | | | 60,725 | | | (203,746) | | * | |
| | | | | | | | | | | | |
Income (loss) before income taxes | | | (184,827) | | | 487,754 | | | (672,581) | | * | |
Income tax (provision) benefit, net | | | 67,988 | | | (58,169) | | | 126,157 | | * | |
Effective tax rate | | | 36.8 | % | 11.9 | % | | | | | ||
Net income (loss) | | | (116,839) | | | 429,585 | | | (546,424) | | * | |
Less: Net income (loss) attributable to noncontrolling interests, net of tax | | | 22,346 | | | 17,355 | | | 4,991 | | 28.8 | |
Net income (loss) attributable to DISH Network | | $ | (139,185) | | $ | 412,230 | | $ | (551,415) | | * | |
| | | | | | | | | | | | |
* Percentage is not meaningful.
Interest income. “Interest income” totaled $19 million during the three months ended September 30, 2023, an increase of $11 million compared to the same period in 2022. This increase primarily resulted from higher percentage returns earned on our cash and marketable investment securities, partially offset by lower average cash and marketable investment securities balances during the three months ended September 30, 2023.
Other, net. “Other, net” expense totaled $151 million during the three months ended September 30, 2023, compared to income of $58 million during the same period in 2022. This change primarily resulted from a $155 million decrease in the fair value of our option to purchase certain of T-Mobile’s 800 MHz spectrum licenses during the three months ended September 30, 2023 compared to a $34 million increase during the three months ended September 30, 2022. See Note 5 in the Notes to our Condensed Consolidated Financial Statements for further information.
Income tax (provision) benefit, net. Our income tax benefit was $68 million during the three months ended September 30, 2023, compared to a provision of $58 million during the same period in 2022. This change was primarily related to a decrease in “Income (loss) before income taxes.” Our effective tax rate for the three months ended September 30, 2023 and 2022 was impacted by federal tax credits.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Nine Months Ended September 30, 2023 Compared to the Nine Months Ended September 30, 2022.
| | | | | | | | | | | | |
| | For the Nine Months Ended | | | | |||||||
| | September 30, | | Variance | | |||||||
Statements of Operations Data |
| 2023 |
| 2022 |
| Amount |
| % |
| |||
| | (In thousands) | | | | |||||||
Operating income (loss) | | $ | 487,951 | | $ | 1,670,324 | | $ | (1,182,373) | | (70.8) | |
| | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | |
Interest income | | | 90,907 | | | 21,853 | | | 69,054 | | * | |
Interest expense, net of amounts capitalized | | | (27,379) | | | (15,067) | | | (12,312) | | (81.7) | |
Other, net | | | (120,726) | | | 114,264 | | | (234,990) | | * | |
Total other income (expense) | | | (57,198) | | | 121,050 | | | (178,248) | | * | |
| | | | | | | | | | | | |
Income (loss) before income taxes | | | 430,753 | | | 1,791,374 | | | (1,360,621) | | (76.0) | |
Income tax (provision) benefit, net | | | (81,930) | | | (372,936) | | | 291,006 | | 78.0 | |
Effective tax rate | | | 19.0 | % | 20.8 | % | | | | | ||
Net income (loss) | | | 348,823 | | | 1,418,438 | | | (1,069,615) | | (75.4) | |
Less: Net income (loss) attributable to noncontrolling interests, net of tax | | | 64,980 | | | 50,725 | | | 14,255 | | 28.1 | |
Net income (loss) attributable to DISH Network | | $ | 283,843 | | $ | 1,367,713 | | $ | (1,083,870) | | (79.2) | |
| | | | | | | | | | | | |
* Percentage is not meaningful.
Interest income. “Interest income” totaled $91 million during the nine months ended September 30, 2023, an increase of $69 million compared to the same period in 2022. This increase primarily resulted from higher percentage returns earned on our cash and marketable investment securities, partially offset by lower average cash and marketable investment securities balances during the nine months ended September 30, 2023.
Other, net. “Other, net” expense totaled $121 million during the nine months ended September 30, 2023, compared to income of $114 million during the same period in 2022. This change primarily resulted from a $192 million decrease in the fair value of our option to purchase certain of T-Mobile’s 800 MHz spectrum licenses during the nine months ended September 30, 2023 compared to a $92 million increase during the nine months ended September 30, 2022. In addition, the nine months ended September 30, 2023 was positively impacted by $73 million in gains from the repurchases of our 3 3/8% Convertible Notes due 2026 (the “Convertible Notes due 2026”), our 2 3/8% Convertible Notes due 2024 (the “Convertible Notes due 2024”) and 0% Convertible Notes due 2025 (the “Convertible Notes due 2025,” and collectively with the Convertible Notes due 2026 and the Convertible Notes due 2024, the “Convertible Notes”) and our 5 7/8% Senior Notes due 2024. See Note 5 and 9 in the Notes to our Condensed Consolidated Financial Statements for further information.
Income tax (provision) benefit, net. Our income tax provision was $82 million during the nine months ended September 30, 2023, a decrease of $291 million compared to the same period in 2022. The decrease in the provision was primarily related to a decrease in “Income (loss) before income taxes” and a decrease in our effective tax rate.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Non-GAAP Performance Measures and Reconciliation
It is management’s intent to provide non-GAAP financial information to enhance the understanding of our GAAP financial information, and it should be considered by the reader in addition to, but not instead of, the financial statements prepared in accordance with GAAP. Each non-GAAP financial measure is presented along with the corresponding GAAP measure so as not to imply that more emphasis should be placed on the non-GAAP measure. We believe that providing these non-GAAP measures in addition to the GAAP measures allows management, investors and other users of our financial information to more fully and accurately assess both consolidated and segment performance. The non-GAAP financial information presented may be determined or calculated differently by other companies and may not be directly comparable to that of other companies.
Consolidated EBITDA
Consolidated 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. Consolidated EBITDA is used as a measurement of operating efficiency and overall financial performance and we believe it is a helpful measure for those evaluating operating performance in relation to our competitors. 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.
| | | | | | | | | | | | |
| | For the Three Months Ended | | For the Nine Months Ended | ||||||||
| | September 30, | | |||||||||
|
| 2023 |
| 2022 |
| 2023 |
| 2022 | ||||
| | (In thousands) | ||||||||||
Net income (loss) attributable to DISH Network | | $ | (139,185) | | $ | 412,230 | | $ | 283,843 | | $ | 1,367,713 |
Interest, net | | | (8,476) | | | (2,784) | | | (63,528) | | | (6,786) |
Income tax provision (benefit), net | | | (67,988) | | | 58,169 | | | 81,930 | | | 372,936 |
Depreciation and amortization | | | 294,797 | | | 174,736 | | | 806,504 | | | 519,300 |
Consolidated EBITDA | | $ | 79,148 | | $ | 642,351 | | $ | 1,108,749 | | $ | 2,253,163 |
| | | | | | | | | | | | |
The changes in Consolidated EBITDA during the three and nine months ended September 30, 2023, compared to the same periods in 2022, were primarily a result of the factors described in connection with operating revenues and operating expenses, including the impact from changes in the fair value of our option to purchase certain of T-Mobile’s 800 MHz spectrum licenses.
Segment OIBDA
Segment OIBDA, which is presented below, is a non-GAAP measure and does not purport to be an alternative to operating income (loss) as a measure of operating performance. We believe this measure is useful to management, investors and other users of our financial information in evaluating operating profitability of our business units on a more variable cost basis as it excludes the depreciation and amortization expenses related primarily to capital expenditures and acquisitions for those business units, as well as in evaluating operating performance in relation to our competitors. Segment OIBDA is calculated by adding back depreciation and amortization expense to business unit operating income (loss). See Note 11 to the Notes to our Condensed Consolidated Financial Statements for further information.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
| | | | | | | | | | | | | | | |
For the Three Months Ended September 30, 2023 | | | Pay-TV | | | Retail Wireless | | | 5G Network Deployment | | | Wireless | | | Consolidated |
| | | (In thousands) | ||||||||||||
Segment operating income (loss) | | $ | 589,465 | | $ | (168,166) | | $ | (463,105) | | $ | — | | $ | (41,806) |
Depreciation and amortization | | | 86,100 | | | 62,549 | | | 163,959 | | | (17,811) | | | 294,797 |
OIBDA | | $ | 675,565 | | $ | (105,617) | | $ | (299,146) | | $ | (17,811) | | $ | 252,991 |
| | | | | | | | | | | | | | | |
For the Three Months Ended September 30, 2022 | | | | | | | | | | | | | | | |
| | | | ||||||||||||
Segment operating income (loss) | | $ | 647,654 | | $ | (8,032) | | $ | (212,593) | | $ | — | | $ | 427,029 |
Depreciation and amortization | | | 105,948 | | | 43,404 | | | 31,248 | | | (5,864) | | | 174,736 |
OIBDA | | $ | 753,602 | | $ | 35,372 | | $ | (181,345) | | $ | (5,864) | | $ | 601,765 |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
For the Nine Months Ended September 30, 2023 | | | Pay-TV | | | Retail Wireless | | | 5G Network Deployment | | | Wireless | | | Consolidated |
| | (In thousands) | |||||||||||||
Segment operating income (loss) | | $ | 1,985,490 | | $ | (298,872) | | $ | (1,198,667) | | $ | — | | $ | 487,951 |
Depreciation and amortization | | | 286,148 | | | 168,597 | | | 385,070 | | | (33,311) | | | 806,504 |
OIBDA | | $ | 2,271,638 | | $ | (130,275) | | $ | (813,597) | | $ | (33,311) | | $ | 1,294,455 |
| | | | | | | | | | | | | | | |
For the Nine Months Ended September 30, 2022 | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Segment operating income (loss) | | $ | 2,185,171 | | $ | 41,160 | | $ | (556,007) | | $ | — | | $ | 1,670,324 |
Depreciation and amortization | | | 328,073 | | | 127,381 | | | 77,652 | | | (13,806) | | | 519,300 |
OIBDA | | $ | 2,513,244 | | $ | 168,541 | | $ | (478,355) | | $ | (13,806) | | $ | 2,189,624 |
The changes in OIBDA during the three and nine months ended September 30, 2023, compared to the same periods in 2022, were primarily a result of the factors described in connection with operating revenues and operating expenses.
LIQUIDITY AND CAPITAL RESOURCES
Cash, Cash Equivalents and Current Marketable Investment Securities
We consider all liquid investments purchased with a remaining maturity of 90 days or less at the date of acquisition to be cash equivalents. See Note 5 in the Notes to our Condensed Consolidated Financial Statements for further information regarding our marketable investment securities. As of September 30, 2023, cash, cash equivalents and current marketable investment securities totaled $1.035 billion compared to $2.621 billion as of December 31, 2022, a decrease of $1.586 billion. This decrease in cash, cash equivalents and current marketable investment securities primarily resulted from capital expenditures of $3.075 billion (including capitalized interest related to FCC authorizations), the repurchases and redemption of our senior notes of $1.451 billion, net repurchases of our Convertible Notes of $110 million, unsettled sales of marketable investment securities of $119 million, and repayments of long-term debt and finance lease obligations of $96 million, partially offset by cash generated from operating activities of $1.718 billion and $1.522 billion in net proceeds from the issuance of our 11 3/4% Senior Notes due 2027.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Cash Flow
The following discussion highlights our cash flow activities during the nine months ended September 30, 2023.
Cash flows from operating activities
For the nine months ended September 30, 2023, we reported “Net cash flows from operating activities” of $1.718 billion primarily attributable to $1.398 billion of “Net income (loss)” adjusted to exclude the non-cash items for “Depreciation and amortization” expense, “Realized and unrealized losses (gains) on investments, derivatives and other,” “Non-cash, stock-based compensation” expense, and “Deferred tax expense (benefit).” In addition, “Net cash flows from operating activities” was impacted by the timing difference between book expense and cash payments, including income taxes.
Cash flows from investing activities
For the nine months ended September 30, 2023, we reported outflows from “Net cash flows from investing activities” of $2.498 billion primarily related to capital expenditures of $3.075 billion (including capitalized interest related to FCC authorizations), partially offset by $573 million in net sales of marketable investment securities. The capital expenditures included $2.159 billion of capital expenditures for our Retail Wireless and 5G Network Deployment business units, $748 million of capitalized interest related to FCC authorizations, $56 million for new and existing DISH TV subscriber equipment and $112 million of satellite and other corporate capital expenditures.
Cash flows from financing activities
For the nine months ended September 30, 2023, we reported outflows from “Net cash flows from financing activities” of $132 million primarily related to the repurchases and redemption of our senior notes of $1.451 billion, net repurchases of our Convertible Notes of $110 million and repayments of long-term debt and finance lease obligations of $96 million, partially offset by $1.522 billion in net proceeds from the issuance of our 11 3/4% Senior Notes due 2027.
Free Cash Flow
We define free cash flow as “Net cash flows from operating activities” less “Purchases of property and equipment,” and “Capitalized interest related to FCC authorizations,” as shown on our Condensed Consolidated Statements of Cash Flows. We believe free cash flow is an important liquidity metric because it measures, during a given reporting period, the amount of cash generated that is available to repay debt obligations, make investments (including strategic wireless 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.”
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Free cash flow can be significantly impacted from period to period by changes in “Net income (loss)” adjusted to exclude certain non-cash charges, operating assets and liabilities, “Purchases of property and equipment,” and “Capitalized interest related to FCC authorizations.” These items are shown in the “Net cash flows from operating activities” and “Net cash flows from investing activities” sections on our Condensed Consolidated Statements of Cash Flows included herein. Operating asset and liability balances can fluctuate significantly from period to period and there can be no assurance that free cash flow will not be negatively impacted by material changes in operating assets and liabilities in future periods, since these changes depend upon, among other things, management’s timing of payments and control of inventory levels, and cash receipts. In addition to fluctuations resulting from changes in operating assets and liabilities, free cash flow can vary significantly from period to period depending upon, among other things, subscriber additions (losses), service revenue, subscriber churn, subscriber acquisition and retention costs including amounts capitalized under our equipment lease programs for DISH TV subscribers, operating efficiencies, increases or decreases in purchases of property and equipment, expenditures related to our 5G Network Deployment and other factors.
The following table reconciles free cash flow to “Net cash flows from operating activities.”
| | | | | | | |
| | For the Nine Months Ended | | ||||
| | | |||||
|
| 2023 |
| 2022 | | ||
| | (In thousands) | | ||||
Net cash flows from operating activities |
| $ | 1,718,096 | | $ | 2,141,503 | |
Purchases of property and equipment (including capitalized interest related to FCC authorizations) | | | (3,074,626) | | | (2,587,435) | |
Free cash flow | | $ | (1,356,530) | | $ | (445,932) | |
| | | | | | | |
Operational Liquidity
We make general investments in property such as, among others, satellites, wireless devices, set-top boxes, information technology and facilities that support our Pay-TV segment and Retail Wireless business unit. We are also making significant additional investments and may partner with others to, among other things, continue our 5G Network Deployment and further commercialize, build-out and integrate our Wireless spectrum licenses and related assets. Moreover, 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, but there can be no assurance that over time we will recoup or earn a return on the upfront investment.
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 our churn rate and how successful we are at retaining our current subscribers. To the extent 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 service margins. To the extent our “Cost of services” grow faster than our “Service revenue,” the amount of cash flow that is generated per existing subscriber is reduced. Our Pay-TV service margins have been reduced by, among other things, higher programming costs. Our Retail Wireless service margins are impacted by, among other things, our MNSA agreement with T-Mobile and our NSA agreement with AT&T and the speed with which we are able to convert Wireless subscribers onto our 5G Network. 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 acquiring new subscribers. Conversely, the slower we acquire subscribers, the more our operating cash flow is enhanced in that period.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Finally, our future cash flow is impacted by, among other things, the rate at which we complete our 5G Network Deployment, incur litigation expense, and any cash flow from financing activities. We anticipate operating expenditures for our 5G Network Deployment to increase for the remainder of 2023 as we continue to, among other things, deploy cell sites and communication towers to commercialize our 5G Network. Since we reached our 5G Network Deployment milestone of 70% of the U.S. population, we expect our capital expenditures will decline in the near term. However, as we prepare for our next build-out requirements in 2025, we expect our capital expenditures to increase as we approach this deadline. As a result, our historical cash flow is not necessarily indicative of our future cash flows. As of September 30, 2023, as a result of, among other things, capital expenditures for our 5G Network Deployment, we experienced negative free cash flow. We expect that this trend will continue in 2023 and in future periods. In addition, declines in our Pay-TV and Wireless subscriber base and any decrease in subscriber-related margins negatively impact our cash flow, and there can be no assurance that our subscriber declines will not continue.
Subscriber Base – Pay TV Segment and Retail Wireless Business Unit
See “Results of Operations” above for further information.
Subscriber Acquisition and Retention Costs
We incur significant upfront costs to acquire Pay-TV and Wireless subscribers, including, but not limited to, advertising, independent third-party retailer incentives, payments made to third parties, equipment and wireless device subsidies, installation services, and/or 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 be successful in achieving that objective. With respect to our DISH TV services and Boost Infinite, we employ business rules such as minimum credit requirements for prospective customers and contractual commitments. We strive to provide outstanding customer service to increase the likelihood of customers keeping their Pay-TV services and Boost Infinite over longer periods of time. Subscriber acquisition costs for SLING TV subscribers are significantly lower than those for DISH TV subscribers. Our subscriber acquisition costs may vary significantly from period to period.
We incur significant costs to retain our existing DISH TV subscribers, generally as a result of upgrading their equipment to next generation receivers, primarily including our Hopper® receivers, and by providing retention credits. As with our subscriber acquisition costs, our retention upgrade spending includes the cost of equipment and installation services. In certain circumstances, we also offer programming at no additional charge and/or promotional pricing for limited periods to existing customers in exchange for a contractual commitment to receive service for a minimum term. A component of our retention efforts includes the installation of equipment for customers who move. Retention costs for Wireless subscribers are primarily related to promotional pricing on upgraded wireless devices for qualified existing subscribers. Our DISH TV and Wireless subscriber retention costs may vary significantly from period to period.
Seasonality
Historically, the first half of the year generally produces fewer gross new DISH TV subscriber activations than the second half of the year, as is typical in the pay-TV industry. In addition, the first and fourth quarters generally produce a lower DISH TV churn rate than the second and third quarters. However, in recent years, 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. As a result, historical trends in seasonality described above may not be indicative of future trends.
Our net SLING TV subscriber additions are impacted by, among other things, certain major sporting events and other major television events. The first and third quarters generally produce higher gross new Wireless subscriber activations. The historical trends discussed above, for net DISH TV subscriber additions, net SLING TV subscriber additions and gross new Wireless subscriber activations, may not be indicative of future trends. There can be no assurance that these trends will not continue and/or accelerate.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Satellites
Operation of our DISH TV services requires that we have adequate satellite transmission capacity for the programming that we offer. Moreover, competitive conditions may require that we 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 owned or leased 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.
Covenants and Restrictions Related to our Long-Term Debt
We are subject to the covenants and restrictions set forth in the indentures related to our long-term debt. In particular, the indentures related to our outstanding senior notes issued by DISH DBS Corporation (“DISH DBS”) 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’ capital stock or repurchase DISH DBS’ capital stock; (iv) make certain investments; (v) create liens; (vi) enter into certain transactions with affiliates; (vii) merge or consolidate with another company; and (viii) transfer or sell assets. The indentures related to our outstanding senior secured notes contain restrictive covenants that, among other things, impose limitations on our ability and certain of our subsidiaries to: (i) incur additional indebtedness; (ii) enter into sale and leaseback transactions; (iii) pay dividends or make distributions on our capital stock or repurchase our capital stock; (iv) make certain investments of spectrum collateral; (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, senior secured notes and our other long-term debt could become immediately payable. The senior notes and senior secured notes also provide that the debt may be required to be prepaid if certain change-in-control events occur. In addition, the Convertible Notes provide that, if a “fundamental change” (as defined in the related indenture) occurs, holders may require us to repurchase for cash all or part of their Convertible Notes. As of the date of filing of this Quarterly Report on Form 10-Q, we and DISH DBS were in compliance with the covenants and restrictions related to our respective long-term debt.
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. Economic weakness may create greater incentive for signal theft, piracy and subscriber fraud, which could lead to higher subscriber churn and reduced revenue.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Obligations and Future Capital Requirements
Contractual Obligations
See Note 10 in the Notes to our Condensed Consolidated Financial Statements for further information.
Future Capital Requirements
We expect to fund our future working capital, capital expenditures, other investments, and debt service requirements from cash generated from operations, existing cash, restricted cash, cash equivalents and marketable investment securities balances, and cash generated through raising additional capital. We may need to make significant additional investments to, among other things, continue our 5G Network Deployment and further commercialize, build-out and integrate our Wireless spectrum licenses and related assets. The amount of capital required to fund our future working capital, capital expenditure and other investment needs varies, depending on, among other things, the rate at which we complete our 5G Network Deployment, the purchase of additional wireless spectrum licenses and the rate at which we acquire new subscribers and the cost of subscriber acquisition and retention. Certain of our capital expenditures for 2023 are expected to be driven by the rate of our 5G Network Deployment as well as costs associated with subscriber premises equipment. These expenditures are necessary for our 5G Network Deployment as well as to operate and maintain our DISH TV services. Consequently, we consider them to be non-discretionary.
Our capital expenditures vary depending on, among other things, 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 economic weakness and uncertainty. Our DISH TV subscriber base has been declining and there can be no assurance that our DISH TV subscriber base will not continue to decline and that the pace of such decline will not accelerate. In the event that our DISH TV subscriber base continues to decline, it will have a material adverse long-term effect on our cash flow.
On November 15, 2021 the SNR Put Right was exercised. On October 21, 2022 the Northstar Put Right was exercised. The consummation of the sale exercised under the SNR Put Right and the Northstar Put Right is subject to consent by the FCC. As of September 30, 2023, the aggregate value of Northstar Manager’s ownership interest in Northstar Spectrum and SNR Management’s ownership interest in SNR HoldCo was $529 million, recorded as “Redeemable noncontrolling interests” on our Condensed Consolidated Balance Sheets. Subsequently, the FCC consented to the sale of Northstar Manager’s ownership interests in Northstar Spectrum, which we purchased for a total of approximately $109 million on October 12, 2023.
We have and expect to continue to incur significant expenditures in 2023 and 2024 related to our 5G Network Deployment, including, but not limited to, capital expenditures associated with our 5G Network Deployment and the potential purchase of additional wireless spectrum licenses, including, but not limited to, SNR HoldCo’s ownership interest. The amount of capital required will also depend on, among other things, the growth of our Retail Wireless business unit and the levels of investment necessary to support potential strategic initiatives that may arise from time to time. These factors, including, but not limited to, a reduction in our available future cash flows as a result of our 5G Network Deployment, will require us to raise additional capital in the future, which may not be available on favorable terms.
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 favorable terms. These developments may have a significant effect on our cost of financing and our liquidity position.
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS – Continued
Wireless – 5G Network Deployment
See Note 10 in the Notes to our Condensed Consolidated Financial Statements for further information.
Availability of Credit and Effect on Liquidity
The ability to raise capital has generally existed for us despite economic weakness and uncertainty. While modest fluctuations in the cost of capital will not likely impact our current operational plans, significant fluctuations could have a material adverse effect on our business, results of operations and financial condition.
Debt Issuances and Maturity
Our 5% Senior Notes due 2023 with an aggregate principal balance of $1.5 billion were repurchased or redeemed as of March 15, 2023. During the three and nine months ended September 30, 2023, we repurchased approximately $44 million and $49 million, respectively, of our 2 3/8% Convertible Notes due 2024 in open market trades. The remaining balance of approximately $951 million matures on March 15, 2024. During both the three and nine months ended September 30, 2023, we repurchased approximately $11 million of our 5 7/8% Senior Notes due 2024 in open market trades. The remaining balance of approximately $1.989 billion matures on November 15, 2024. Due to capital expenditures related to our 5G Network Deployment, among other things, we do not currently have cash, marketable investment securities balances and/or projected future cash flows to fully fund our 2024 debt maturities. We will raise additional capital prior to the maturity of this obligation, which may not be available at the historical interest rates of our long-term debt due to, among other things, the current market rate environment.
New Accounting Pronouncements
See Note 2 in the Notes to our Condensed Consolidated Financial Statements for further information.
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Item 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk during the nine months ended September 30, 2023. For additional information, see Item 7A. Quantitative and Qualitative Disclosures About Market Risk in Part II of our Annual Report on Form 10-K for the year ended December 31, 2022.
Item 4.CONTROLS AND PROCEDURES
Conclusion regarding disclosure controls and procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in internal control over financial reporting
There has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1.LEGAL PROCEEDINGS
See Note 10 “Commitments and Contingencies – Litigation” in the Notes to our Condensed Consolidated Financial Statements for information regarding certain legal proceedings in which we are involved.
Item 1A. RISK FACTORS
Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2022 includes a detailed discussion of our risk factors. The information presented below updates, and should be read in conjunction with, the risk factors and information disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
We have experienced and may continue to experience cyber-attacks or other malicious activities that disrupted or may continue to disrupt our business and any future failure or disruption of our information technology infrastructure and communications systems or those of third parties that we use in our operations, could harm our business.
In February 2023, we disclosed that our systems were subject to a cyber-security incident that compromised certain data. The services of cyber-security experts and outside advisors were retained to assist in the evaluation of the situation. We determined that the outage was due to a cyber-security incident and notified appropriate law enforcement authorities. During the first quarter of 2023, we incurred certain cyber-security-related expenses, including, but not limited to, costs to remediate the incident and provide additional customer support. Subsequent to the first quarter of 2023, we have not incurred material expenses resulting from the cyber-security incident and do not expect to incur material expenses in future periods.
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We are subject to persistent cyber-security incidents and threats to our networks and systems. Although we take protective measures designed to secure our information technology systems and endeavor to modify such protective measures as circumstances warrant, our information technology hardware and software infrastructure and communications systems, or those of third parties that we use in our operations, may be vulnerable to a variety of interruptions, including, without limitation, natural disasters, terrorist attacks, telecommunications failures, cyber-attacks and other malicious activities such as unauthorized access, physical or electronic break-ins, misuse, computer viruses or other malicious code, computer denial of service attacks and other events that could disrupt or harm our business. The protective measures we take may not be sufficient for all eventualities and may themselves be vulnerable to hacking, malfeasance, system error or other irregularities. For example, certain parties may attempt to fraudulently induce employees or subscribers into disclosing usernames, passwords or other sensitive information, which may in turn be used to access our information technology systems.
In addition, the capacity, reliability and security of our information technology hardware and software infrastructure (including, but not limited to, our billing systems) and communications systems, or those of third parties that we use in our operations, are important to the operation of our business, which would suffer in the event of system failures or cyber-attacks. Likewise, our ability to expand and update our information technology infrastructure in response to our growth and changing needs is important to the continued implementation of our new service offering initiatives. Our inability to expand or upgrade our technology infrastructure could have adverse consequences, which could include, among other things, the delayed implementation of new service offerings, service or billing interruptions, and the diversion of resources that would otherwise be invested in expanding our business and operations. We rely on certain third parties for key components of our information technology and communications systems and ongoing service, all of which affect our Pay-TV and Wireless services. Some of our key systems and operations, including, but not limited to, those supplied by third-party providers, are not fully redundant, and our disaster recovery planning cannot account for all eventualities. Interruption and/or failure of these systems has in the past disrupted our operations, and could interrupt our services, result in significant financial expenditures and damage our reputation, thus adversely impacting our ability to retain our current subscribers and attract new Pay-TV and Wireless subscribers.
In addition, third-party providers of some of our key systems may also experience interruptions to their information technology hardware and software infrastructure and communications systems that could adversely impact us and over which we may have limited or no control. We may obtain certain confidential, proprietary and personal information about our subscribers, personnel and vendors, and may provide this information to third parties in connection with our business. If one or more of such interruptions or failures occur to us or our third-party providers, it potentially could jeopardize such information and other information processed and stored in, and transmitted through, our or our third-party providers’ information technology hardware and software infrastructure and communications systems, or otherwise cause interruptions or malfunctions in our operations, which could result in, among other things, lawsuits, government claims, investigations or proceedings, significant losses or reputational damage. Due to the fast-moving pace of technology, it may be difficult to detect, contain and remediate every such event in a timely manner or at all. We may be required to expend significant additional resources to modify our protective measures or to investigate and remediate vulnerabilities or other exposures, and we may be subject to financial losses. In addition, this may divert management’s attention and resources away from our business, therefore adversely affect our business. Furthermore, the amount and scope of insurance we maintain may not cover all expenses related to such activities or all types of claims that may arise.
As a result of the increasing awareness concerning the importance of safeguarding personal information, the potential misuse of such information and legislation that has been adopted or is being considered regarding the protection, privacy and security of personal information, the potential liability associated with information-related risks is increasing, particularly for businesses like ours that handle personal subscriber data. The occurrence of any network or information system related events or security breaches could have a material adverse effect on our reputation, business, financial condition and results of operations. Significant incidents could result in a disruption of our operations, subscriber dissatisfaction, damage to our reputation or a loss of subscribers and revenues.
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We cannot provide any assurances that actions taken by us, or our third-party providers, will adequately repel a future cyber-security incident or prevent or substantially mitigate the impacts of cyber-security breaches or misuses of or unauthorized access to our networks or systems or those of third-party environments, or that we, or our third-party providers, will be able to effectively identify, investigate, and remediate such incidents in a timely manner or at all. We expect to continue to be the target of cyber-security incidents, given the nature of our business, and we expect the same with respect to our third-party providers. If we fail to protect confidential information or to prevent operational disruptions from future cyber-security incidents, there may be a material adverse effect on our business, reputation, financial condition, cash flows, and operating results.
Changes in levels of U.S. government spending or overall spending priorities could impact, among other things, our business, financial condition and results of operations.
We derive a portion of our revenue from subscribers who receive benefits under the Affordable Connectivity Program (“ACP”), an FCC benefit program that helps ensure that households can afford access to broadband. Levels of U.S. government spending are very difficult to predict and may be impacted by numerous factors such as, among others, the political environment, macroeconomic conditions and the ability of the U.S. government to enact relevant legislation such as authorization and appropriations bills.
Discontinuation, amendment or repeal of ACP, or replacement of ACP with one having different eligibility requirements could negatively impact, among other things, our Wireless subscriber activations and Wireless churn rate, which may impact our decision to continue to participate in the program. We cannot predict whether or when any future changes to the ACP may occur, or whether or to what extent those changes may affect our operations or impose additional costs on our business.
In particular, reduced government funding for benefits programs such as ACP would result in a reduction in reimbursements to us. Amendments to or repeal of ACP in whole or in part and/or decisions by the FCC could affect us and the manner in which we are reimbursed by such programs, all of which could materially and adversely affect our business, results of operations and financial condition.
Risks Related to the Merger with EchoStar
While the Merger is pending, DISH Network and EchoStar will be subject to business uncertainties as well as contractual restrictions under the Amended Merger Agreement that may have an adverse effect on their respective businesses.
The Merger will occur only if stated conditions are met, many of which are outside of DISH Network’s and EchoStar’s control. In addition, each of DISH Network and EchoStar has the right to terminate the Amended Merger Agreement under specified circumstances. Accordingly, there may be uncertainty regarding the completion of the Merger. Further, there may be uncertainty about the effect of the Merger on employees, commercial partners and customers. Such uncertainty could cause customers and others to defer or decline entering into or extending contracts with, or making other decisions concerning, DISH Network and/or EchoStar, or to seek to change existing business relationships with either of them. Such uncertainty also may impair DISH Network’s and/or EchoStar’s ability to retain and motivate key personnel. These uncertainties may have an adverse effect on the companies’ respective businesses and, consequently, on EchoStar following the completion of the Merger.
In addition, the Amended Merger Agreement contains customary covenants which restrict each of DISH Network and EchoStar, without the consent of the other party, from taking certain specified actions until the Merger closes or the Amended Merger Agreement terminates. These restrictions may prevent DISH Network and EchoStar from pursuing otherwise attractive business opportunities that may arise prior to the completion of the Merger or termination of the Amended Merger Agreement.
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DISH Network and EchoStar will incur significant expenses in connection with the Merger, which may adversely affect each company’s business, financial condition and results of operation.
DISH Network and EchoStar each expect to incur significant, nonrecurring costs in connection with the completion of the Merger and the integration of the operations of the two companies, and may incur additional costs to maintain employee morale and to retain key employees. These nonrecurring costs include significant fees and expenses relating to legal, accounting and financial advisory fees, regulatory filings and other costs associated with the Merger. These expenses, certain of which are payable whether or not the Merger is completed, may not be offset by any benefits ultimately realized as a result of the Merger and could adversely affect the business, financial condition and results of operations of each of DISH Network and EchoStar.
The Amended Merger Agreement restricts DISH Network’s and EchoStar’s ability to pursue alternatives to the Merger.
The Amended Merger Agreement contains provisions that make it more difficult for DISH Network and EchoStar to enter into alternative transactions with third parties. The Amended Merger Agreement prohibits DISH Network and EchoStar from soliciting alternative acquisition proposals from third parties, providing information to third parties in connection with an alternative acquisition proposal and engaging in discussions with third parties regarding alternative acquisition proposals. These provisions could discourage a potential third-party acquirer that might have an interest in DISH Network or EchoStar from considering or pursuing an alternative transaction with DISH Network or EchoStar, respectively, or proposing such a transaction, even if it were prepared to pay consideration with a higher per share value than the total value proposed to be paid in the Merger. Further, because the requisite votes of the DISH Network stockholders and EchoStar stockholders were obtained by virtue of the delivery of the Ergen DISH Written Consent and Ergen EchoStar Written Consent, respectively, no other action by DISH Network stockholders and EchoStar stockholders is required to complete the Merger, and therefore DISH Network and EchoStar cannot solicit, initiate, facilitate or otherwise take any further action relating to any alternative acquisition proposal.
Failure to attract, motivate and retain executives and other key employees could diminish the anticipated benefits of the Merger.
The success of the Merger will depend in part on the retention of personnel critical to the business and operations of DISH Network and EchoStar due to, for example, their technical skills or management expertise. Competition for qualified personnel can be intense and qualified personnel can be in high demand. Current and prospective employees of DISH Network and EchoStar may experience uncertainty about their future role until strategies with regard to these employees are announced or executed, which may impair DISH Network’s and EchoStar’s ability to attract, retain and motivate key management, technical and other personnel prior to and following the Merger. Employee retention may be particularly challenging during the pendency of the Merger. If DISH Network and EchoStar are unable to retain personnel, including key management, who are critical to the successful integration and future operations of the companies, DISH Network and EchoStar could face, among other risks, disruptions in their operations, loss of existing customers, loss of key information, expertise or know-how, and unanticipated additional recruitment and training costs. In addition, the loss of key personnel could diminish the anticipated benefits of the Merger.
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Certain of DISH Network’s and EchoStar’s directors, executive officers and employees have interests in the Merger that may be different from, or in addition to, the interests of the DISH Network stockholders and EchoStar stockholders, respectively.
Certain of DISH Network’s and EchoStar’s directors, executive officers and employees have interests in the Merger that may be different from, or in addition to, the interests of the DISH Network stockholders and EchoStar stockholders, respectively. These interests include, among others, Mr. Ergen’s continuation as director and Chairman of EchoStar after the Merger, Hamid Akhavan, the Chief Executive Officer and President of EchoStar, serving as President and Chief Executive Officer of the combined company following the Merger, the continued employment of certain other executive officers of DISH Network and EchoStar after the Merger, the continued positions of certain directors of DISH Network and EchoStar as directors of EchoStar after the Merger, and directors’, executive officers’ and employees’ equity holdings in both DISH Network and EchoStar. With respect to DISH Network’s directors and executive officers, these interests also include the treatment of previously granted equity awards in the Merger and the rights to continuing indemnification and directors’ and officers’ liability insurance. The DISH Network Special Committee and a special transaction committee of independent directors of the EchoStar Board of Directors (the “EchoStar Special Committee”) and our Board of Directors and the EchoStar Board of Directors were aware of and considered these interests, among other matters, in deciding to recommend and approve, respectively, the terms of the Amended Merger Agreement and the Merger.
DISH Network and EchoStar may be subject to lawsuits relating to the Merger, which may impact the timing of the closing and the parties’ ability to close the Merger and may adversely impact their respective businesses.
DISH Network and EchoStar and their respective directors, officers and advisors may be subject to lawsuits relating to the Merger. Litigation is very common in connection with the sale of public companies, and lawsuits are often brought in an effort to enjoin the relevant merger or seek monetary relief. In particular, the interests of DISH Network’s and EchoStar’s respective directors, executive officers and employees in the Merger may increase the risk of litigation intended to enjoin or prevent the Merger and the risk of other dissident stockholder activity related thereto. In the past, and in particular following the announcement of a significant transaction, periods of volatility in the overall market or declines in the market price of a company’s securities, stockholder litigation and dissident stockholder proposals have often been instituted against companies alleging conflicts of interest in business dealings with affiliated or related persons and entities. The affiliation between DISH Network and EchoStar and the interests of their respective directors, executive officers and employees in the Merger may precipitate such activities by dissident stockholders and, if instituted, such activities could result in substantial costs, a material delay or prevention of the Merger and a diversion of management’s attention, even if the stockholder action is without merit or ultimately unsuccessful.
DISH Network and EchoStar cannot predict whether such lawsuits will be brought, or the outcome of such lawsuits or others, nor can either company predict the amount of time and expense that will be required to resolve such litigation. An unfavorable resolution of any such litigation surrounding the Merger could delay or prevent the completion of the Merger, which may adversely affect DISH Network’s and/or EchoStar’s business, financial condition and results of operations. Further, the defense or settlement of any lawsuit or claim that remains unresolved at the time the Merger is completed may adversely affect the combined company’s business, financial condition, results of operations and cash flows following the Merger.
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The market value of DISH Network Class A common stock and EchoStar Class A Common Stock may vary significantly prior to the Merger, and DISH Network Class A stockholders therefore cannot be sure of the value of the consideration they will receive in the Merger.
On the terms and subject to the conditions set forth in the Amended Merger Agreement, at the Effective Time, each share of DISH Network Class A common stock and DISH Network Class C common stock outstanding immediately prior to the Effective Time will be converted into the right to receive a number of validly issued, fully paid and non-assessable shares of EchoStar Class A Common Stock equal to the Exchange Ratio (with all shares of DISH Network Class C common stock outstanding, if any, treated for purposes of this calculation as if converted into DISH Network Class A common stock at the effective conversion rate set forth in the DISH Network Articles of Incorporation) and (ii) each share of DISH Network Class B common stock outstanding immediately prior to the Effective Time will be converted into the right to receive a number of validly issued, fully paid and non-assessable shares of EchoStar Class B Common Stock equal to the Exchange Ratio.
DISH Network Class B common stock and EchoStar Class B Common Stock are not listed or traded on a national securities exchange, and there are no shares of DISH Network Class C common stock outstanding. The market value of DISH Network Class A common stock and EchoStar Class A Common Stock at the Effective Time may vary significantly from the market value of such stock on October 2, 2023 (the last full trading day before the public announcement of the signing of the Amended Merger Agreement), or the date the Amended Merger Agreement was executed. Because the Exchange Ratio will not be adjusted to reflect any changes in the market price of DISH Network Class A common stock or EchoStar Class A Common Stock, the market price of EchoStar Class A Common Stock issued to DISH Network Class A stockholders in the Merger and the market value of DISH Network Class A common stock converted in the Merger may each be higher or lower than the values of those shares on earlier dates. Accordingly, at any time prior to the completion of the Merger, the DISH Network Class A stockholders will not know or be able to determine the value of EchoStar Class A Common Stock they will receive as consideration at the Effective Time. Similarly, EchoStar will not know or be able to determine the value of the EchoStar Class A Common Stock that will be paid to DISH Network Class A stockholders as consideration at the Effective Time.
Changes in the market price of DISH Network Class A common stock and EchoStar Class A Common Stock may result from a variety of factors that are beyond the companies’ control, including, but not limited to, changes in their respective businesses, operations and prospects, governmental actions, legal proceedings and developments and other matters generally affecting the securities market. Market assessments of the benefits of the Merger, the likelihood that the Merger will be completed and general and industry-specific market and economic conditions may also have an effect on the market price of DISH Network Class A common stock and EchoStar Class A Common Stock. Neither DISH Network nor EchoStar is permitted to terminate the Amended Merger Agreement solely because of changes in the market prices of DISH Network Class A common stock or EchoStar Class A Common Stock.
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The Merger is subject to a number of conditions, including receipt of certain regulatory approvals. Failure to complete the Merger could adversely affect the market price of EchoStar Class A Common Stock and/or DISH Network Class A common stock, as well as EchoStar’s and/or DISH Network’s business, financial condition and results of operations.
The respective obligations of DISH Network and EchoStar to consummate the transactions contemplated by the Amended Merger Agreement are subject to the satisfaction or waiver of a number of conditions, including, among others, the receipt of certain regulatory approvals. As a condition to granting the necessary approvals or clearances, governmental authorities may impose requirements, limitations or costs or place restrictions on the conduct of the business of the combined company after the completion of the Merger. Any one of these requirements, limitations, costs, or restrictions could jeopardize or delay the completion, or reduce the anticipated benefits, of the Merger. In addition, there is no guarantee that the conditions to closing will be satisfied (or, if applicable, validly waived) in a timely manner or at all, in which case the closing of the Merger may be delayed or may not occur and the benefits expected to result from the Merger may not be achieved. If the Merger is not completed for any reason, the ongoing businesses of DISH Network and EchoStar may be adversely affected, and DISH Network and EchoStar will be subject to several risks and consequences, including, but not limited to, the following:
| ● | each of DISH Network and EchoStar will be required to pay certain costs relating to the Merger regardless of whether the Merger is completed, such as significant fees and expenses relating to financial advisory, legal, accounting, consulting and other advisory fees and expenses and regulatory filings; and |
| ● | matters relating to the Merger may require substantial commitments of time and resources by EchoStar management and DISH Network management and the expenditure of significant funds in the form of fees and expenses, which could otherwise have been devoted to day-to-day operations and other opportunities that may have been beneficial to DISH Network and EchoStar as separate companies, as the case may be. |
In addition, if the Merger is not completed, DISH Network and/or EchoStar may experience negative reactions from the financial markets and from their respective employees, commercial partners and customers.
DISH Network and EchoStar also could be subject to litigation, including litigation related to failure to complete the Merger, or to enforce the other parties’ obligations under the Amended Merger Agreement.
If the Merger is not completed, DISH Network and EchoStar cannot assure their respective stockholders that the risks described above will not materially affect the stock price, business, financial condition and results of operations of EchoStar and/or DISH Network.
DISH Network currently has significant indebtedness as compared to EchoStar. Following the Merger, EchoStar stockholders will hold equity interests in a company with substantially higher leverage than EchoStar had prior to the Merger.
As of September 30, 2023, EchoStar had consolidated long-term debt outstanding of $1.5 billion in principal amount and total assets of approximately $6.2 billion, and DISH Network had consolidated long-term debt outstanding of approximately $21.2 billion in principal amount and total assets of approximately $53.7 billion. After giving effect to the Merger, EchoStar and its subsidiaries will have consolidated long-term debt of approximately $22.7 billion in principal amount on a combined basis and total consolidated assets of approximately $59.8 billion. Therefore, after the completion of the Merger, EchoStar stockholders will hold equity interests in a company with substantially higher leverage than EchoStar had prior to the Merger. DISH Network’s indebtedness could have significant consequences, including, but not limited to:
| ● | making it more difficult for EchoStar to satisfy its obligations; |
| ● | a dilutive effect on EchoStar’s outstanding equity capital or future earnings; |
| ● | increasing EchoStar’s vulnerability to general adverse economic conditions, including, but not limited to, changes in interest rates; |
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| ● | requiring EchoStar to devote a substantial portion of its cash toward making interest and principal payments on its indebtedness, thereby reducing the amount of cash available for other purposes, resulting in limited financial and operating flexibility to changing economic and competitive conditions; |
| ● | limiting EchoStar’s ability to raise additional capital because it may be more difficult for it to obtain debt financing on attractive terms or at all; and |
| ● | placing EchoStar at a disadvantage compared to its competitors that are less leveraged. |
EchoStar may operate DISH Network’s business different from how it has been operated in the past.
After the completion of the Merger, DISH Network will be a wholly-owned subsidiary of EchoStar and will no longer be a publicly traded company. EchoStar may operate DISH Network’s business in a manner different from how DISH Network has operated in the past, and may pursue different strategic objectives than DISH Network has pursued to date as a separate public company. As a result, DISH Network’s prior results may not be indicative of DISH Network’s future performance as a subsidiary of EchoStar, and such results should not be relied upon as an indicator of DISH Network’s performance after the completion of the Merger.
If the Merger does not qualify as a tax-free merger under the Code, then the DISH Network stockholders may be required to pay substantial U.S. federal income taxes.
Pursuant to the Amended Merger Agreement, DISH Network and EchoStar will cooperate in good faith and use their respective reasonable best efforts to obtain an opinion of DISH Network’s (or the DISH Network Special Committee’s) tax counsel to be issued to DISH Network with respect to the treatment of the Merger as a “reorganization” within the meaning of Section 368(a) of the Code (a “Tax Opinion”), but the receipt of such Tax Opinion is not a condition to the completion of the Merger. DISH Network expects to receive a Tax Opinion that based on customary assumptions, representations and covenants, the Merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. Even if DISH Network receives such Tax Opinion, if any of the assumptions, representations or covenants on which the Tax Opinion is based is or becomes incorrect, incomplete, inaccurate or is otherwise not complied with, the validity of the Tax Opinion may be adversely affected and the tax consequences of the Merger could differ from those described herein. An opinion of counsel represents counsel’s legal judgment and is not binding on the IRS or any court. The parties do not intend to request any ruling from the IRS as to the U.S. federal income tax consequences of the Merger, and there can be no assurance that the IRS will not assert, or a court would not sustain, a position contrary to the intended tax treatment of the Merger described above.
If the Merger were taxable, DISH Network stockholders would be considered to have made a taxable sale of their DISH Common Stock to EchoStar and, consequently, DISH Network stockholders would recognize taxable gain or loss on their receipt of EchoStar Common Stock (and cash in lieu of fractional shares) in the Merger.
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Risks Related to the Business of EchoStar Following the Merger
The businesses of DISH Network and EchoStar may not be integrated successfully or such integration may be more difficult, time consuming or costly than expected. Operating costs, customer loss and business disruption, including, but not limited to, difficulties in maintaining relationships with employees, customers, suppliers or vendors, may be greater than expected following the Merger. Synergies from the Merger may not be realized within expected timeframes or at all.
The Merger involves the combination of two companies that, although under common control and subject to existing commercial relationships, currently operate as separate public companies. The combination of two separate companies is complex, costly and time-consuming and may require significant management attention and resources which may divert attention from DISH Network’s and EchoStar’s respective ongoing businesses and operations. The failure to meet the challenges involved in combining the two companies and to realize the anticipated benefits of the Merger could cause an interruption of, or a loss of momentum in, the activities of DISH Network and/or EchoStar and could adversely affect the results of operations of the combined company following the Merger. The overall combination of the two companies may also result in material unanticipated problems, expenses, liabilities, competitive responses and loss of customer and other business relationships. The difficulties of combining the operations of the companies include, among others:
| ● | the diversion of management and employee attention to integration matters; |
| ● | difficulties in integrating operations and systems, including, but not limited to, communications systems, administrative and information technology infrastructure and financial reporting and internal control systems; |
| ● | challenges in conforming standards, controls, procedures and accounting and other policies, business cultures and compensation structures between the two companies; |
| ● | difficulties in integrating employees and teams of the respective businesses, and attracting and retaining key personnel; |
| ● | challenges in retaining and obtaining customers, suppliers and other commercial relationships; |
| ● | difficulties in managing the expanded operations of a larger and more complex company; and |
| ● | potential unknown liabilities, adverse consequences and unforeseen increased expenses associated with the Merger. |
Many of these factors are outside of DISH Network’s and EchoStar’s control and any one of them could result in lower revenues, higher costs and diversion of management time and energy, which could materially impact the business, financial condition and results of operations of EchoStar after the Merger. In addition, even if the operations of the companies are integrated successfully, the full benefits of the Merger may not be realized, including, among others, the synergies, cost savings or sales or growth opportunities that are expected. These benefits may not be achieved within the anticipated time frame or at all. All of these factors could negatively impact the price of the EchoStar Class A Common Stock following the Merger. As a result, it cannot be assured that the combination of the two companies will result in the realization of the full benefits expected from the Merger within the anticipated time frames, or at all.
The market price for shares of EchoStar Class A Common Stock after the completion of the Merger may be affected by factors different from, or in addition to, those that historically have affected or currently affect the market prices of shares of DISH Network Class A common stock and EchoStar Class A Common Stock.
Upon consummation of the Merger, holders of DISH Network Class A common stock will become holders of EchoStar Class A Common Stock. The businesses of DISH Network and its subsidiaries are different from those of EchoStar and its subsidiaries. Accordingly, after the consummation of the Merger, the results of operations of each company will be affected by some factors that are different from those currently or historically affecting the results of operations of EchoStar and those currently or historically affecting the results of operations of DISH Network. The results of operations of each company may also be affected by factors different from those that currently affect or have historically affected either company.
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Following the Merger, EchoStar will continue to be controlled by one principal stockholder.
DISH Network and EchoStar are each controlled by Mr. Ergen, who also serves as the Chairman of both companies and will continue to serve as the Chairman of EchoStar following the consummation of the Merger. Mr. Ergen beneficially owns approximately 90.3% of the total voting power of DISH Network equity securities, and also beneficially owns approximately 93.4% of the total voting power of EchoStar equity securities.
Pursuant to the Amended Support Agreement, Mr. Ergen and the other Ergen Stockholders have agreed not to vote, or cause or direct to be voted, the shares of DISH Network Class A common stock owned by them, other than with respect to any matter presented to the holders of EchoStar Class A Common Stock on which holders of EchoStar Class B Common Stock are not entitled to vote, for three years following the closing, such that the Ergen Stockholders’ voting power of EchoStar will be approximately 90.4% for such three-year period. Through his beneficial ownership of DISH Network’s and EchoStar’s equity securities, Mr. Ergen has the ability to elect a majority of the directors and to control all other matters requiring the approval of DISH Network or EchoStar stockholders, and will continue to have such ability as to EchoStar following completion of the Merger. As a result of Mr. Ergen’s voting power, DISH Network and EchoStar currently each are, and following the Merger EchoStar will continue to be, a “controlled company” as defined in the NASDAQ listing rules and, therefore, not subject to certain NASDAQ requirements relating to director independence and nomination and board committee composition.
Following the Merger, EchoStar will continue to be controlled by its principal stockholder and it will be difficult for a third party to acquire EchoStar without Mr. Ergen’s approval, even if doing so may be beneficial to stockholders.
In addition, pursuant to the Amended Support Agreement, prior to the Merger closing and at the request of the Ergen Stockholders, EchoStar and the Ergen Stockholders will enter into a registration rights agreement reasonably acceptable to the parties providing for the registration of the Ergen Stockholders’ shares of EchoStar Class A Common Stock or EchoStar Class B Common Stock received as part of the Merger consideration and/or EchoStar Class B Common Stock held by such stockholders immediately prior to the Merger closing.
Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
The following table provides information regarding repurchases of our Class A common stock from July 1, 2023 through September 30, 2023:
| | | | | | | | | | | |
| | | | | | | Total Number of | | Maximum Approximate | | |
| | Total | | | | | Shares Purchased | | Dollar Value of Shares | | |
| | Number of | | Average | | as Part of Publicly | | that May Yet be | | ||
| | Shares | | Price Paid | | Announced | | Purchased Under the | | ||
Period |
| Purchased |
| per Share |
| Programs |
| Programs (1) |
| ||
| | (In thousands, except share data) | | ||||||||
| — | | $ | — | | — | | $ | 1,000,000 | | |
| — | | $ | — | | — | | $ | 1,000,000 | | |
| — | | $ | — | | — | | $ | 1,000,000 | | |
Total | | — | | $ | — | | — | | $ | 1,000,000 | |
| | | | | | | | | | | |
| (1) | On October 20, 2023, our Board of Directors authorized stock repurchases of up to $1.0 billion of our outstanding Class A common stock through and including December 31, 2024. Purchases under our repurchase program may be made through open market purchases, privately negotiated transactions, or Rule 10b5-1 trading plans, subject to market conditions and other factors. We may elect not to purchase the maximum amount of shares allowable under this program and we may also enter into additional share repurchase programs authorized by our Board of Directors. |
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Item 5.OTHER INFORMATION
10b5-1 Trading Arrangements
None of the Company’s directors or Section 16 officers i adopted, i modified or i terminated a i Rule 10b5-1 trading i arrangement or a i non-Rule 10b5-1 trading arrangement during the Company’s fiscal quarter ended September 30, 2023, as such terms are defined under Item 408(a) of Regulation S-K.
Item 6.EXHIBITS
| (a) | Exhibits. |
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2.1* | | |
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10.1* | | |
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31.1◻ | | |
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31.2◻ | | |
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32.1◻ | | |
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32.2◻ | | |
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101◻ | | The following materials from the Quarterly Report on Form 10-Q of DISH Network for the quarter ended September 30, 2023 filed on November 6, 2023, formatted in Inline eXtensible Business Reporting Language (“iXBRL”): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss), (iii) Condensed Consolidated Statements of Changes in Stockholders’ Equity (Deficit), (iv) Condensed Consolidated Statements of Cash Flows and (v) related notes to these financial statements. |
104◻ | | Cover Page Interactive Data File (the cover page XBRL tags are embedded in the Inline XBRL document). |
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* | ||||||
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** | Schedules, annexes and/or exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. DISH Network hereby undertakes to furnish supplemental copies of any of the omitted schedules, annexes and/or exhibits upon request by the SEC; provided, that DISH Network may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) for any schedules so furnished. | |||||
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Im | | |
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| DISH NETWORK CORPORATION | |
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| By: | /s/ W. Erik Carlson |
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| President and Chief Executive Officer | |
| (Duly Authorized Officer) | |
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| By: | /s/ Paul W. Orban |
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| Executive Vice President and Chief Financial Officer (Principal Financial Officer) | |
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| | |
| By: | /s/ James S. Allen |
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| Senior Vice President and Chief Accounting Officer | |
| (Principal Accounting Officer) | |
Date: November 6, 2023
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| 11/9/20 | ||||
| 11/2/20 | ||||
| 10/27/20 | ||||
| 7/10/20 | ||||
| 7/1/20 | 4, 8-K | |||
| 6/29/20 | ||||
| 6/5/20 | ||||
| 6/3/20 | 4, SC 13D/A | |||
| 5/21/20 | SC 13D/A | |||
| 4/1/20 | 4 | |||
| 3/29/20 | ||||
| 3/16/20 | 3, 4 | |||
| 2/25/20 | ||||
| 2/4/20 | ||||
| 1/17/20 | ||||
| 1/15/20 | ||||
| 1/10/20 | ||||
| 1/9/20 | ||||
| 12/30/19 | ||||
| 12/5/19 | 4 | |||
| 11/22/19 | 424B5, 8-A12B, 8-K, CERT, SC 13D/A | |||
| 10/18/19 | ||||
| 9/10/19 | 4, 4/A, 8-K | |||
| 8/12/19 | ||||
| 7/26/19 | 8-K | |||
| 7/22/19 | ||||
| 7/19/19 | ||||
| 7/15/19 | ||||
| 7/10/19 | ||||
| 6/25/19 | ||||
| 5/19/19 | ||||
| 5/9/19 | 4 | |||
| 3/28/19 | ||||
| 2/11/19 | 4, SC 13G/A | |||
| 1/31/19 | ||||
| 10/26/18 | 4 | |||
| 7/12/18 | 4 | |||
| 7/3/18 | ||||
| 6/25/18 | ||||
| 6/8/18 | 8-K | |||
| 6/7/18 | 8-K | |||
| 3/31/18 | 10-Q, 8-K | |||
| 3/12/18 | SC 13D/A | |||
| 2/10/18 | ||||
| 2/7/18 | SC 13G/A | |||
| 1/26/18 | ||||
| 1/24/18 | ||||
| 12/31/17 | 10-K, SD | |||
| 11/8/17 | ||||
| 11/6/17 | ||||
| 10/26/17 | ||||
| 10/10/17 | 4 | |||
| 9/12/17 | ||||
| 8/31/17 | 4 | |||
| 8/29/17 | 4 | |||
| 7/19/17 | ||||
| 6/6/17 | ||||
| 3/17/17 | 8-K | |||
| 3/2/17 | ||||
| 3/1/17 | ||||
| 2/28/17 | ||||
| 2/27/17 | ||||
| 2/14/17 | SC 13G/A | |||
| 2/13/17 | ||||
| 2/9/17 | ||||
| 1/31/17 | 8-K | |||
| 1/19/17 | ||||
| 1/1/17 | 3, 4 | |||
| 12/31/16 | 10-K | |||
| 12/20/16 | ||||
| 11/4/16 | ||||
| 10/31/16 | ||||
| 9/23/16 | ||||
| 8/23/16 | ||||
| 8/19/16 | ||||
| 8/8/16 | 8-K | |||
| 7/20/16 | ||||
| 7/14/16 | ||||
| 5/16/16 | ||||
| 1/20/16 | ||||
| 10/27/15 | ||||
| 10/1/15 | 4, 8-K, ARS | |||
| 9/9/15 | ||||
| 8/18/15 | CT ORDER | |||
| 8/1/15 | ||||
| 7/17/15 | ||||
| 5/13/15 | ||||
| 2/11/15 | ||||
| 10/13/14 | ||||
| 3/13/14 | ||||
| 2/20/14 | ||||
| 1/1/14 | 4 | |||
| 10/1/12 | ||||
| 3/9/12 | 8-K | |||
| 1/1/10 | ||||
| 12/31/08 | 10-K, 4, ARS | |||
| 1/1/08 | 8-K | |||
| List all Filings | ||||
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 1/04/24 EchoStar Corp. S-3ASR 1/04/24 6:396K Toppan Merrill/FA 11/07/23 DISH Network Corp. DEFM14C 1:3.4M Toppan Merrill/FA 11/07/23 EchoStar Corp. 424B3 1:3.3M Toppan Merrill/FA |
As Of Filer Filing For·On·As Docs:Size Issuer Filing Agent 10/03/23 DISH Network Corp. 8-K:1,5,8,910/02/23 12:1.1M Toppan Merrill/FA |