ECHOSTAR CORPORATION Unless the context indicates otherwise, the terms "we," "us," "EchoStar ," the "Company" and "our" refer toEchoStar Corporation and its subsidiaries. The following Management's Discussion and Analysis of our Financial Condition and Results of Operations ("Management's Discussion and Analysis") should be read in conjunction with our accompanying Consolidated Financial Statements and notes thereto ("Accompanying Consolidated Financial Statements") in Item 1 of this Quarterly Report on Form 10-Q ("Form 10-Q"). This Management's Discussion and Analysis is intended to help provide an understanding of our financial condition, changes in our financial condition and our results of operations. Many of the statements in this Management's Discussion and Analysis are forward-looking statements that involve assumptions and are subject to risks and uncertainties that are often difficult to predict and beyond our control. Actual results could differ materially from those expressed or implied by such forward-looking statements. Refer to the Disclosure Regarding Forward-Looking Statements in this Form 10-Q for further discussion. For a discussion of additional risks, uncertainties and other factors that could impact our results of operations or financial condition, refer to the Risk Factors in Part II, Item 1A of this Form 10-Q and in Part I, Item 1A of our most recent Annual Report on Form 10-K ("Form 10-K") filed with theSecurities and Exchange Commission ("SEC"). Further, such forward-looking statements speak only as of the date of this Form 10-Q and we undertake no obligation to update them.
EXECUTIVE SUMMARY
We are a global provider of broadband satellite technologies, broadband internet services for consumer customers, which include home and small to medium-sized businesses, and satellite services. We also deliver innovative network technologies, managed services and communications solutions for enterprise customers, which include aeronautical and government enterprises. We currently operate in two business segments: Hughes and ESS. These segments are consistent with the way we make decisions regarding the allocation of resources, as well as how operating results are reviewed by our chief operating decision maker, who is the Company's Chief Executive Officer. Our operations also include various corporate departments (primarily Executive,Treasury , Strategic Development, Human Resources, Information Technology, Finance, Accounting, Real Estate and Legal) and other activities, such as costs incurred in certain satellite development programs and other business development activities, and gains or losses from certain of our investments, that have not been assigned to our business segments. These activities, costs and income, as well as eliminations of intersegment transactions, are accounted for in Corporate and Other in our segment reporting.
All amounts presented in this Management's Discussion and Analysis, unless
otherwise noted, are expressed in thousands of
Highlights from our financial results are as follows:
Consolidated Results of Operations for the Three Months Ended
• Revenue of$504.7 million •Operating income of$62.6 million •Net income of$30.2 million •Net income attributable toEchoStar common stock of$33.4 million and basic and diluted earnings per share of common stock of$0.38 •Earnings before interest, taxes, depreciation and amortization, and net income attributable to non-controlling interests ("EBITDA") of$184.3 million (see reconciliation of this non-GAAP measure in Results of Operations) 37
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED Consolidated Financial Condition as ofSeptember 30, 2021 : •Total assets of$6.2 billion •Total liabilities of$2.7 billion •Total stockholders' equity of$3.5 billion •Cash and cash equivalents and marketable investment securities of$1.6 billion
Hughes Segment
Our Hughes segment is a global provider of broadband satellite technologies and
broadband internet services to consumer customers and broadband network
technologies, managed services, equipment, hardware, satellite services and
communications solutions to consumer and enterprise customers. The Hughes
segment also designs, provides and installs gateway and terminal equipment to
customers for other satellite systems. In addition, our Hughes segment designs,
develops, constructs and provides telecommunication networks comprising
satellite ground segment systems and terminals to mobile system operators and
our enterprise customers.
We incorporate advances in technology to reduce costs and to increase the
functionality and reliability of our products and services. Through advanced
and proprietary methodologies, technologies, software and techniques, we
continue to improve the efficiency of our networks. We invest in technologies
to enhance our system and network management capabilities, specifically our
managed services for enterprises. We also continue to invest in next generation
technologies that can be applied to our future products and services.
We continue to focus our efforts on growing our consumer revenue by maximizing
utilization of our existing satellites while planning for new satellite capacity
to be launched or acquired. Our consumer revenue growth depends on our success
in adding new and retaining existing subscribers, as well as increasing our
Average Revenue Per User/subscriber ("ARPU"). Service and acquisition costs
related to ongoing support for our direct and indirect customers and partners
are typically impacted most significantly by our growth. The growth of our
enterprise businesses relies heavily on global economic conditions and the
competitive landscape for pricing relative to competitors and alternative
technologies. We have seen a limited number of our enterprise customers file for
bankruptcy protection. We have reserved an amount related to pre-petition
receivables and are working closely with these customers on providing
post-petition services and products, as well as working with the customer
regarding collection of pre-petition amounts.
Our Hughes segment currently uses capacity from our owned and leased satellites,
including additional satellite capacity acquired from third-party providers, to
provide services to our customers. Growth of our consumer subscriber base in the
U.S. continues to be constrained where we are nearing or have reached maximum
capacity in most areas. Our Latin America consumer subscriber base in certain
areas has also become capacity constrained in the current quarter. While these
constraints are not expected to be resolved until we launch new satellites, we
continue to focus on revenue growth in all areas and consumer subscriber growth
in the areas where we have available capacity.
In May 2019 , we entered into an agreement with Bharti Airtel Limited ("BAL") and
its subsidiary, Bharti Airtel Services Limited (together with BAL, "Bharti"),
pursuant to which Bharti will contribute its very small aperture terminal
("VSAT") telecommunications services and hardware business in India to our two
existing Indian subsidiaries that conduct our VSAT services and hardware
business. The combined entities will provide broadband satellite and hybrid
solutions for enterprise networks. Upon consummation of the transaction, Bharti
will have a 33% ownership interest in the combined business. The completion of
the transaction is subject to customary regulatory approvals and closing
conditions. No assurance can be given that the transaction will be consummated
on the terms agreed to or at all.
In August 2017 , we entered into a long-term contract for the design and
construction of the EchoStar XXIV satellite, a new, next-generation, high
throughput geostationary satellite. The EchoStar XXIV satellite is primarily
intended to provide additional capacity for our HughesNet satellite internet
service ("HughesNet service") in North, Central and South America as well as
enterprise broadband services. The EchoStar XXIV satellite is expected to be
launched in the second half of 2022. Further delays or impediments could have a
material adverse impact on our business operations, future revenues, financial
position and prospects, the completion of manufacture of the EchoStar XXIV
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED satellite and our planned expansion of satellite broadband services throughout North, South andCentral America . InDecember 2020 , we entered into an agreement with a launch provider for the launch of EchoStar XXIV. Capital expenditures associated with the construction and launch of the EchoStar XXIV satellite are included in Corporate and Other in our segment reporting. We continue our efforts to expand our consumer satellite services business outside of theU.S. We have been delivering high-speed consumer satellite broadband services inBrazil sinceJuly 2016 and are also providing satellite broadband internet service in several other Latin American countries. InSeptember 2015 , we entered into 15-year agreements with affiliates ofTelesat Canada for Ka-band capacity on the Telesat T19V satellite located at the 63 degree west longitude orbital location, which was launched inJuly 2018 . Telesat T19V was placed in service during the fourth quarter of 2018 and augmented the capacity being provided by the EUTELSAT 65 West A satellite and the EchoStar XIX satellite inSouth America . InMarch 2021 , we entered into an agreement for additional capacity on the Telesat T19V satellite overPuerto Rico .
Our broadband subscribers include customers that subscribe to our HughesNet
services in the
The following table presents our approximate number of broadband subscribers:
As of
September 30, 2021 June 30, 2021
United States 1,120,000 1,144,000
Latin America 390,000 398,000
Total broadband subscribers 1,510,000 1,542,000
The following table presents the approximate number of net subscriber additions:
For the three months ended
September 30, 2021 June 30, 2021
United States (24,000) (20,000)
Latin America (8,000) 9,000
Total net subscriber additions (32,000) (11,000)
OurU.S. consumer subscriber base in certain areas continues to be capacity constrained and we are managing the available capacity to maintain service quality to our existing subscribers. While the balancing of total subscribers relative to capacity utilization in the third quarter resulted in lower total subscribers, ARPU increased from the second quarter. During the third quarter, the lower net subscribers were due to both lower gross additions and higher churn as compared to the second quarter. OurLatin America consumer subscriber base in certain areas has also become capacity constrained in the current quarter. Continued high bandwidth demand in certain areas has resulted in managing subscriber growth and similar to theU.S. , we are balancing capacity utilization with subscriber levels in the impacted areas which resulted in lower total subscribers. Although subscribers decreased in the third quarter of 2021, ARPU increased from the second quarter. During the third quarter, the lower net subscribers were due to both lower gross additions and higher churn as compared to the second quarter.
As of
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED ESS Segment Our ESS segment provides satellite services on a full-time and/or occasional-use basis toU.S. government service providers, internet service providers, broadcast news organizations, content providers and private enterprise customers. We operate our ESS business using primarily the EchoStar IX satellite and theEchoStar 105/SES-11 satellite and related infrastructure. Revenue in our ESS segment depends largely on our ability to continuously make use of our available satellite capacity with existing customers and our ability to enter into commercial relationships with new customers. Our ESS segment, like others in the fixed satellite services industry, has encountered, and may continue to encounter, negative pressure on transponder rates and demand. As ofSeptember 30, 2021 andDecember 31, 2020 , our ESS segment had contracted revenue backlog of$8.3 million and$6.7 million , respectively. We define contracted revenue backlog for our ESS segment as contracted future satellite lease revenue. Other Business Opportunities Our industry continues to evolve with the increasing worldwide demand for broadband internet access for information, entertainment and commerce. The current COVID-19 pandemic has made even more evident the worldwide need and demand for connectivity and communications to facilitate an ever-increasing virtual global community and workplace. In addition to fiber and wireless systems, technologies such as geostationary high throughput satellites, low-earth orbit ("LEO") networks and medium-earth orbit ("MEO") systems are expected to continue to play significant roles in enabling global broadband access, networks and services. We intend to use our expertise, technologies, capital, investments, global presence, relationships and other capabilities to continue to provide broadband internet systems, equipment, networks and services for information, the internet-of-things, entertainment, education, remote-connectivity and commerce across industries and communities globally for consumer and enterprise customers. We are closely tracking the developments in next-generation satellite businesses, and we are seeking to utilize our services, technologies, licenses and expertise to find new commercial opportunities for our business. We intend to continue to selectively explore opportunities to pursue investments, commercial alliances, partnerships, joint ventures, acquisitions, dispositions and other strategic initiatives and transactions, domestically and internationally, that we believe may allow us to increase our existing market share, increase our satellite capacity, expand into new satellite and other technologies, markets and customers, broaden our portfolio of services, products and intellectual property, make our business more valuable, align us for future growth and expansion, maximize the return on our investments and strengthen our business and relationships with our customers. We may allocate or dispose of significant resources for long-term value that may not have a short or medium-term or any positive impact on our revenue, results of operations, or cash flow. 40
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
S-Band Strategy
We intend to continue to explore the development and deployment of S-band
technologies that we expect will reduce the cost of satellite communications for
internet of things, machine-to-machine communications, public protection,
disaster relief and other end-to-end services worldwide and the integration
of our products and services into new global, hybrid networks that leverage
multiple satellites and terrestrial technologies. We believe we remain in a
unique position to develop a hybrid mobile satellite service ("MSS") and
complementary ground component ("CGC") network in the European Union and its
member states ("E.U."), the United Kingdom ("U.K.") and other European
countries, including through the use of our EchoStar XXI satellite, which was
placed into service in November 2017 , and the EUTELSAT 10A payload. We have
positioned ourselves to continue to develop the S-band spectrum globally by
acquiring Sirion Global Pty Ltd. , which we have renamed EchoStar Global which
holds global S-band non-geostationary satellite spectrum rights for MSS.
Additionally, we entered into a contract with Tyvak Nano-Satellite Systems, Inc.
for the design and construction of S-band nano-satellites. We launched two
nano-satellites in the third quarter of 2020. Following launch, both
nano-satellites experienced technical anomalies that precluded them from
fulfilling their intended regulatory milestone missions. We obtained milestone
relief due to these force majeure events. In the second quarter of 2021, we
launched our third nano-satellite. The nano-satellite was successfully
commissioned and placed at the altitude prescribed in our license for the S-band
frequency. We have completed the process of fulfilling the remaining
requirements under the International Telecommunication Union ("ITU") Radio
Regulations of bringing the Australian filing into use. The nano-satellite will
now be used to develop and test a wide range of potential S-band applications
and services. We also hold licenses for S-band MSS and terrestrial services in
Mexico .
Cybersecurity
We and third parties with whom we work face a constantly evolving landscape of
cybersecurity threats in which hackers and other parties use a complex
assortment of techniques and methods to execute cyberattacks. Cybersecurity
incidents have increased significantly in quantity and severity and are expected
to continue to increase. In addition to our efforts to mitigate cyber-attacks,
we are making investments to alleviate the potential impact to our products. As
a result of these efforts, we could discover new vulnerabilities within our
products and systems. We may not discover all such vulnerabilities due to the
scale of activities on our platforms, or due to other factors, including but not
limited to issues outside of our control. In addition, our IT systems and
infrastructure are vulnerable to damage from a variety of sources, including
telecommunications or network failures, malicious acts, human errors and natural
disasters. Moreover, despite network security and backup measures, some of our
servers are potentially vulnerable to physical or electronic break-ins, computer
viruses and similar disruptive problems.
We are not aware of any cyber-incidents with respect to our owned or leased
satellites or other networks, equipment or systems that have had a material
adverse effect on our business, costs, operations, prospects, results of
operation or financial position during the three and nine months ended
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED RESULTS OF OPERATIONS
Three Months Ended
The following table presents our consolidated results of operations for the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 : For the three months ended September 30, Variance Statements of Operations Data 2021 2020 Amount %
Revenue:
Services and other revenue$ 432,739 $ 426,532 $ 6,207 1.5 Equipment revenue 71,921 46,970 24,951 53.1 Total revenue 504,660 473,502 31,158 6.6 Costs and expenses: Cost of sales - services and other 138,179 146,577 (8,398) (5.7) % of total services and other revenue 31.9 % 34.4 % Cost of sales - equipment 62,328 37,079 25,249 68.1 % of total equipment revenue 86.7 % 78.9 % Selling, general and administrative expenses 112,986 115,358 (2,372) (2.1) % of total revenue 22.4 % 24.4 % Research and development expenses 7,974 7,676 298 3.9 % of total revenue 1.6 % 1.6 % Depreciation and amortization 120,596 129,822 (9,226) (7.1) Total costs and expenses 442,063 436,512 5,551 1.3 Operating income (loss) 62,597 36,990 25,607 69.2 Other income (expense): Interest income, net 5,725 7,364 (1,639) (22.3) Interest expense, net of amounts capitalized (16,313) (37,967) 21,654 (57.0) Gains (losses) on investments, net 3,748 14,998 (11,250) (75.0) Equity in earnings (losses) of unconsolidated affiliates, net 74 (2,134) 2,208 * Foreign currency transaction gains (losses), net (6,641) 6,681 (13,322) * Other, net 775 291 484 * Total other income (expense), net (12,632) (10,767) (1,865) 17.3 Income (loss) before income taxes 49,965 26,223 23,742 90.5 Income tax benefit (provision), net (19,748) (2,950) (16,798) * Net income (loss) 30,217 23,273 6,944 29.8
Less: Net loss (income) attributable to non-controlling interests
3,192 2,167 1,025 47.3
Net income (loss) attributable to EchoStar Corporation
common stock $ 33,409 $ 25,440 $ 7,969 31.3
Other data:
EBITDA (1) $ 184,341 $ 188,815 $ (4,474) (2.4)
Subscribers, end of period 1,510,000 1,580,000 (70,000) (4.4)
* Percentage is not meaningful.
(1) A reconciliation of EBITDA to Net income (loss), the most directly
comparable U.S. GAAP measure in our Accompanying Consolidated Financial
Statements, is included in Results of Operations. For further information on our
use of EBITDA, see Explanation of Key Metrics and Other Items.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED The following discussion relates to our results of operations for the three months endedSeptember 30, 2021 and 2020. Services and other revenue. Services and other revenue totaled$432.7 million for the three months endedSeptember 30, 2021 , an increase of$6.2 million , or 1.5%, as compared to 2020. The increase was primarily attributable to increases in our Hughes segment related to sales of broadband services to our enterprise and mobile satellite system customers of$2.6 million and to our consumer customers of$1.9 million . Our Corporate and Other segment increased by$0.9 million . The variance reflects the positive impact of exchange rate fluctuations of$0.9 million . Equipment revenue. Equipment revenue totaled$71.9 million for the three months endedSeptember 30, 2021 , an increase of$25.0 million , or 53.1%, as compared to 2020. The increase was primarily attributable to increases in hardware sales of$27.9 million to our enterprise customers, partially offset by decreases in hardware sales of$2.0 million to our consumer customers. Cost of sales - services and other. Cost of sales - services and other totaled$138.2 million for the three months endedSeptember 30, 2021 , a decrease of$8.4 million , or 5.7%, as compared to 2020. The decrease was primarily attributable to lower costs of services provided to our consumer customers associated with customer care and field services. Cost of sales - equipment. Cost of sales - equipment totaled$62.3 million for the three months endedSeptember 30, 2021 , an increase of$25.2 million , or 68.1%, as compared to 2020. The increase was primarily attributable to the corresponding increase in equipment revenue as well as a non-recurring expense of$2.6 million . Selling, general and administrative expenses. Selling, general and administrative expenses totaled$113.0 million for the three months endedSeptember 30, 2021 , a decrease of$2.4 million , or 2.1%, as compared to 2020. The decrease was primarily attributable to decreases in bad debt expense of$1.7 million . Depreciation and amortization. Depreciation and amortization expenses totaled$120.6 million for the three months endedSeptember 30, 2021 , a decrease of$9.2 million , or 7.1%, as compared to 2020. The decrease was primarily attributable to our SPACEWAY 3 satellite which was fully depreciated at the end of the first quarter of 2021. Interest income, net. Interest income, net totaled$5.7 million for the three months endedSeptember 30, 2021 , a decrease of$1.6 million , or 22.3%, as compared to 2020, primarily attributable to decreases in the yield on our marketable investment securities and a decrease in our marketable investment securities average balance. Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized, totaled$16.3 million for the three months endedSeptember 30, 2021 , a decrease of$21.7 million , or 57.0%, as compared to 2020. The decrease was primarily attributable to a decrease of$18.1 million in interest expense and the amortization of deferred financing cost as a result of the repurchases and maturity of our 7 5/8% Senior Unsecured Notes due 2021 and an increase of$1.9 million in capitalized interest relating to the EchoStar XXIV satellite program. Gains (losses) on investments, net. Gains (losses) on investments, net totaled$3.7 million in gains for the three months endedSeptember 30, 2021 , a decrease of$11.3 million , as compared to 2020. The change was primarily attributable to decreased gains on marketable investment securities of$16.3 million in the third quarter of 2021 as compared to 2020, partially offset by a gain on other equity securities of$5.0 million in 2021. Equity in earnings (losses) of unconsolidated affiliates, net. Equity in earnings (losses) of unconsolidated affiliates, net totaled$0.1 million in earnings for the three months endedSeptember 30, 2021 , a decrease in losses of$2.2 million , as compared to 2020. The decrease in losses was related to net increased earnings from our investments in our equity method investees. Foreign currency transaction gains (losses), net. Foreign currency transaction gains (losses), net totaled$6.6 million in losses for the three months endedSeptember 30, 2021 , as compared to$6.7 million in gains for the three months endedSeptember 30, 2020 , a negative change of$13.3 million . The change was due to the net impact of foreign exchange rate fluctuations of certain foreign currencies during the quarter. 43
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED
Income tax benefit (provision), net. Income tax benefit (provision), net was$(19.7) million for the three months endedSeptember 30, 2021 , as compared to$(3.0) million for the three months endedSeptember 30, 2020 . Our effective income tax rate was 39.5% and 11.2% for the three months endedSeptember 30, 2021 and 2020, respectively. The variations in our effective tax rate from theU.S. federal statutory rate for the three months endedSeptember 30, 2021 were primarily due to excluded foreign losses where the Company carries a full valuation allowance and the impact of state and local taxes. The variations in our current year effective tax rate from theU.S. federal statutory rate for the three months endedSeptember 30, 2020 were primarily due to the increase in our valuation allowance associated with certain foreign losses and by the impact of state and local taxes partially offset by the change in net unrealized gains that are capital in nature and research and experimentation credits.
Net income (loss) attributable to
Amounts
Net income (loss) attributable to
25,607
Decrease (increase) in interest expense, net of amounts capitalized
21,654
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net
2,208
Increase (decrease) in net income (loss) attributable to non-controlling interest
1,025
Increase (decrease) in other, net 484
Increase (decrease) in interest income, net (1,639)
Increase (decrease) in gains (losses) on investments, net (11,250)
Increase (decrease) in foreign currency transaction gains (losses), net
(13,322)
Decrease (increase) in income tax benefit (provision), net
(16,798)
Net income (loss) attributable to
$ 33,409
EBITDA. EBITDA is a non-GAAP financial measure and is described under
Explanation of Key Metrics and Other Items below. The following table
reconciles EBITDA to Net income (loss), the most directly comparable
For the three months ended
September 30, Variance
2021 2020 Amount %
Net income (loss) $ 30,217 $ 23,273 $ 6,944 29.8
Interest income, net (5,725) (7,364) 1,639 (22.3)
Interest expense, net of amounts capitalized 16,313 37,967 (21,654) (57.0)
Income tax provision (benefit), net 19,748 2,950 16,798 *
Depreciation and amortization 120,596 129,822 (9,226) (7.1)
Net loss (income) attributable to
non-controlling interests 3,192 2,167 1,025 47.3
EBITDA $ 184,341 $ 188,815 $ (4,474) (2.4)
* Percentage is not meaningful
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS - CONTINUED
The following table reconciles the change in EBITDA:
Amounts
EBITDA for the three months endedSeptember 30, 2020
16,381
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net
2,208
Decrease (increase) in net loss (income) attributable to non-controlling interests
1,025
Increase (decrease) in other, net 484
Increase (decrease) in gains (losses) on investments, net (11,250)
Increase (decrease) in foreign currency transaction gains (losses), net
(13,322)
EBITDA for the three months endedSeptember 30, 2021
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