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$482.6 million •Operating income (loss) of$53.5 million •Net income (loss) of$77.6 million • Net income (loss) attributable toEchoStar common stock of$78.5 million and basic and diluted earnings (losses) per share of common stock of$0.84 •Earnings before interest, taxes, depreciation and amortization, and net income (loss) attributable to non-controlling interests ("EBITDA") of$258.7 million (see reconciliation of this non-GAAP measure in Results of Operations)
Consolidated Financial Condition as of
•Total assets of$7.0 billion •Total liabilities of$3.4 billion 35
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED •Total stockholders' equity of$3.6 billion •Cash and cash equivalents and marketable investment securities of$2.3 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 satellites to be
launched or acquired. Our consumer revenue growth depends on our success in
adding new and retaining existing subscribers across wholesale and retail
channels, as well as increasing our Average Revenue Per User/subscriber
("ARPU"). Service 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 three of our satellites (the
SPACEWAY 3 satellite, the EchoStar XVII satellite and the EchoStar XIX
satellite), our Al Yah 3 Brazilian payload and 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. 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
satellite and our planned expansion of satellite broadband services throughout
North, South and Central America . In December 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED 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
March 31, 2021 December 31, 2020
United States 1,164,000 1,189,000
Latin America 389,000 375,000
Total broadband subscribers 1,553,000 1,564,000
The following table presents the approximate number of net subscriber additions:
For the three months ended
March 31, 2021 December 31, 2020
United States (25,000) (27,000)
Latin America 14,000 11,000
Total net subscriber additions (11,000) (16,000)
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 first quarter resulted in lower total subscribers, ARPU increased.
In
As ofMarch 31, 2021 andDecember 31, 2020 , our Hughes segment had$1.4 billion and$1.3 billion of contracted revenue backlog, respectively. We define Hughes contracted revenue backlog as our expected future revenue under enterprise customer contracts that are non-cancelable, including lease revenue.
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. 37
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED As ofMarch 31, 2021 andDecember 31, 2020 , our ESS segment had contracted revenue backlog of$9.2 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, medium-earth orbit ("MEO") systems, balloons and High Altitude Platform 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. 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 deploy a mobile satellite service ("MSS") and complementary ground component ("CGC") network in theEuropean Union and its member states ("E.U."), theUnited Kingdom ("U.K.") and other European countries through our EchoStar XXI satellite, which was placed into service inNovember 2017 , and the EUTELSAT 10A payload. We have positioned ourselves to continue to develop the S-band spectrum globally by acquiringSirion 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 withTyvak 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. We expect to launch our third nano-satellite mid-year 2021. Our nano-satellites are designed to facilitate our continued growth in the global S-band market and enable us to leverage our acquisition of EchoStar Global. In addition, inMexico we hold licenses for S-band MSS and terrestrial services.
Cybersecurity
OnDecember 8, 2020 , the cyber security company FireEye announced that they detected a sophisticated nation state level cyber campaign that targeted FireEye, other public and private companies, and government organizations. FireEye reported that the attack against them was facilitated through the Orion IT management software owned by a company called SolarWinds. Based on information from FireEye, we reviewed all instances of SolarWinds software in use at the Company and have determined that the version we are using is not susceptible to the malware within the version that is compromised. 38
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED The SolarWinds hack continues to evolve. Specifically, there have been many reports of intrusions into Microsoft Exchange on-premise systems possibly due to the SolarWinds issue and other unrelated matters. While we are customers of Microsoft, to date, our investigations into the announced issues indicate that we were not detrimentally affected by the vulnerabilities due to our security controls and other proactive measures which include security patching. We continue to receive information about these breaches from theU.S. government and private security firms, and we use this data to update our defense systems and to investigate our own networks for compromise. We will continue to update our systems as more information comes to light in reference to these issues. We are not aware of any additional 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 months endedMarch 31, 2021 and throughMay 6, 2021 . There can be no assurance, however, that any such incident can be detected or thwarted or will not have such a material adverse effect in the future. 39
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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 endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 : For the three months ended March 31, Variance Statements of Operations Data 2021 2020 Amount %
Revenue:
Services and other revenue$ 430,337 $ 408,357 $ 21,980 5.4 Equipment revenue 52,245 57,309 (5,064) (8.8) Total revenue 482,582 465,666 16,916 3.6 Costs and expenses: Cost of sales - services and other 132,789 145,252 (12,463) (8.6) % of total services and other revenue 30.9 % 35.6 % Cost of sales - equipment 45,151 45,908 (757) (1.6) % of total equipment revenue 86.4 % 80.1 % Selling, general and administrative expenses 114,119 125,281 (11,162) (8.9) % of total revenue 23.6 % 26.9 % Research and development expenses 7,545 6,254 1,291 20.6 % of total revenue 1.6 % 1.3 % Depreciation and amortization 129,286 132,368 (3,082) (2.3) Impairment of long-lived assets 230 - 230 * Total costs and expenses 429,120 455,063 (25,943) (5.7) Operating income (loss) 53,462 10,603 42,859 * Other income (expense): Interest income, net 5,949 15,583 (9,634) (61.8) Interest expense, net of amounts capitalized (34,667) (36,233) 1,566 (4.3) Gains (losses) on investments, net 78,600 (46,672) 125,272 * Equity in earnings (losses) of unconsolidated affiliates, net 1,374 2,613 (1,239) (47.4) Foreign currency transaction gains (losses), net (4,069) (10,844) 6,775 (62.5) Other, net (930) (279) (651) * Total other income (expense), net 46,257 (75,832) 122,089 * Income (loss) before income taxes 99,719 (65,229) 164,948 * Income tax benefit (provision), net (22,147) 7,492 (29,639) * Net income (loss) 77,572 (57,737) 135,309 * Less: Net loss (income) attributable to non-controlling interests 947 3,442 (2,495) (72.5) Net income (loss) attributable toEchoStar Corporation common stock$ 78,519 $ (54,295) $ 132,814 * Other data: EBITDA (1)$ 258,670 $ 91,231 $ 167,439 * Subscribers, end of period 1,553,000 1,516,000 37,000 2.4 * Percentage is not meaningful. (1) A reconciliation of EBITDA to Net income (loss), the most directly comparableU.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. 40
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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 ended
Services and other revenue. Services and other revenue totaled
•Services and other revenue from our Hughes segment for the three months endedMarch 31, 2021 increased by$22.4 million , or 5.6%, to$423.6 million compared to 2020. The increase was primarily attributable to increases in sales of broadband services to our consumer customers of$27.0 million , partially offset by a decrease in sales of services to our enterprise customers of$3.1 million . These variances reflect the negative impact of exchange rate fluctuations of$5.4 million , primarily attributable to our consumer customers. Equipment revenue. Equipment revenue totaled$52.2 million for the three months endedMarch 31, 2021 , a decrease of$5.1 million , or 8.8%, as compared to 2020. The decrease was primarily attributable to decreases in hardware sales of$4.8 million to our mobile satellite systems customers. Cost of sales - services and other. Cost of sales - services and other totaled$132.8 million for the three months endedMarch 31, 2021 , a decrease of$12.5 million , or 8.6%, as compared to 2020. The decrease was attributable to lower costs of services provided to our consumer and enterprise customers primarily associated with field services and leased satellite capacity as well as a non-recurring decrease in a certain international regulatory fee of$4.5 million . Cost of sales - equipment. Cost of sales - equipment totaled$45.2 million for the three months endedMarch 31, 2021 , a decrease of$0.8 million , or 1.6%, as compared to 2020. Selling, general and administrative expenses. Selling, general and administrative expenses totaled$114.1 million for the three months endedMarch 31, 2021 , a decrease of$11.2 million , or 8.9%, as compared to 2020. The decrease was primarily attributable to decreased sales and marketing expenses of$9.6 million from our Hughes segment mainly associated with our consumer customers and decreases in bad debt expense of$2.4 million . Depreciation and amortization. Depreciation and amortization expenses totaled$129.3 million for the three months endedMarch 31, 2021 , a decrease of$3.1 million , or 2.3%, as compared to 2020. The decrease was primarily attributable to decreases in other property and equipment depreciation expense of$2.0 million and decreases in amortization of intangibles of$1.5 million . Interest income, net. Interest income, net totaled$5.9 million for the three months endedMarch 31, 2021 , a decrease of$9.6 million , or 61.8%, as compared to 2020, primarily attributable to decreases in the yield on our marketable investment securities. Interest expense, net of amounts capitalized. Interest expense, net of amounts capitalized, totaled$34.7 million for the three months endedMarch 31, 2021 , a decrease of$1.6 million , or 4.3%, as compared to 2020. The decrease was primarily attributable to an increase of$1.3 million in capitalized interest relating to the construction of the EchoStar XXIV satellite and its related infrastructure. Gains (losses) on investments, net. Gains (losses) on investments, net totaled$78.6 million in gains for the three months endedMarch 31, 2021 , an increase of$125.3 million , as compared to 2020. The change was primarily attributable to the gains on marketable investment securities and other equity securities of$98.2 million in 2021 and a$21.3 million impairment loss in 2020.
Equity in earnings (losses) of unconsolidated affiliates, net. Equity in
earnings (losses) of unconsolidated affiliates, net totaled
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - CONTINUED Foreign currency transaction gains (losses), net. Foreign currency transaction gains (losses), net totaled$4.1 million in losses for the three months endedMarch 31, 2021 , as compared to$10.8 million in losses for the three months endedMarch 31, 2020 , a positive change of$6.8 million . The change was due to the net impact of foreign exchange rate fluctuations of certain foreign currencies during the quarter. Income tax benefit (provision), net. Income tax benefit (provision), net was$(22.1) million for the three months endedMarch 31, 2021 , as compared to$7.5 million for the three months endedMarch 31, 2020 . Our effective income tax rate was 22.2% and 11.5% for the three months endedMarch 31, 2021 and 2020, respectively. The variations in our effective tax rate from theU.S. federal statutory rate for the three months endedMarch 31, 2021 were primarily due to excluded foreign losses where the company carries a full valuation allowance and the change in net unrealized gains that are capital in nature. The variations in our current year effective tax rate from theU.S. federal statutory rate for the three months endedMarch 31, 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
$ (54,295) Decrease (increase) in income tax benefit (provision), net
(29,639)
Increase (decrease) in interest income, net (9,634)
Increase (decrease) in net income (loss) attributable to non-controlling interest
(2,495)
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net
(1,239)
Increase (decrease) in other, net (651)
Decrease (increase) in interest expense, net of amounts capitalized
1,566
Increase (decrease) in foreign currency transaction gains (losses), net
6,775
Increase (decrease) in operating income (loss), including depreciation and amortization
42,859
Increase (decrease) in gains (losses) on investments, net 125,272
Net income (loss) attributable toEchoStar Corporation for the three months ended March 31, 2021$ 78,519
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 March
31, Variance
2021 2020 Amount %
Net income (loss) $ 77,572 $ (57,737) $ 135,309 *
Interest income, net (5,949) (15,583) 9,634 (61.8)
Interest expense, net of amounts capitalized 34,667 36,233 (1,566) (4.3)
Income tax provision (benefit), net 22,147 (7,492) 29,639 *
Depreciation and amortization 129,286 132,368 (3,082) (2.3)
Net loss (income) attributable to
non-controlling interests 947 3,442 (2,495) (72.5)
EBITDA $ 258,670 $ 91,231 $ 167,439 *
* 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 ended March 31, 2020$ 91,231 Increase (decrease) in gains (losses) on investments, net
125,272
Increase (decrease) in operating income (loss), excluding depreciation and amortization
39,777
Increase (decrease) in foreign currency transaction gains (losses), net
6,775
Increase (decrease) in other, net (651)
Decrease (increase) in equity in earnings (losses) of unconsolidated affiliates, net
(1,239)
Decrease (increase) in net loss (income) attributable to non-controlling interests
(2,495)
EBITDA for the three months ended March 31, 2021 © Edgar Online, source
