EchoStar CORP: Form 10-Q for the period ended Sep 30, 2024

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 migrate 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.

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 2024 as we continue to, among other things, deploy cell sites and communication towers to continue to commercialize our 5G Network. We expect our capital expenditures to remain consistent in the near term. However, as we prepare for our next build-out requirement deadlines, we expect our capital expenditures to increase as we approach these deadlines. As a result, our historical cash flow is not necessarily indicative of our future cash flows. As of September 30, 2024, 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 2024 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, Retail Wireless and Broadband and Satellite Services Segments

See “Results of Operations” above for further information.

Subscriber Acquisition and Retention Costs

We incur significant upfront costs to acquire Pay-TV, Wireless and Broadband 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 Mobile postpaid, 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 Mobile postpaid service 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.

There have been no material changes in our market risk during the nine months ended September 30, 2024. 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, 2023.

Conclusion regarding disclosure controls and procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and Principal 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 Principal 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.

Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2023 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, 2023.

Risks Relating to the DIRECTV Transaction

Termination of the Purchase Agreement or failure to otherwise complete the DIRECTV Transaction could have a material adverse impact on our business, financial condition and results of operations.

Termination of the Purchase Agreement or any failure to otherwise complete the DIRECTV Transaction may result in various adverse consequences, including:

• our not being able to realize the anticipated benefits of the DIRECTV Transaction;
• our business being materially adversely impacted by the failure to pursue other beneficial opportunities due to the focus of management on the DIRECTV Transaction, without realizing any of the anticipated benefits of completing the DIRECTV Transaction; and
• negative reactions from the financial markets, respective customers and other stakeholders possibly related to the above.

If any of the foregoing consequences were to occur as a result of termination of the Purchase Agreement, it could have a material adverse impact on our business, financial condition and results of operations.

The timing of the completion of the DIRECTV Transaction is not certain, and is subject to certain conditions, some of which we cannot control, which could result in the DIRECTV Transaction not being completed or being completed later than we expect, which could have a material adverse impact on our costs and revenues or otherwise reducing the anticipated benefits of the DIRECTV Transaction.

Pursuant to the Purchase Agreement, the completion of the DIRECTV Transaction is subject to certain closing conditions, including, for example, the satisfaction of certain antitrust and other regulatory approvals and the successful exchange of DISH DBS Notes, none of which have been satisfied, and the absence of legal restraints prohibiting the completion of the DIRECTV Transaction. Governmental agencies may not approve the DIRECTV Transaction or may impose conditions to any such approval or require changes to the terms of the DIRECTV Transaction. Any such conditions or changes could have the effect of delaying completion of the DIRECTV Transaction, imposing costs on or limiting our revenues or otherwise reducing the anticipated benefits of the DIRECTV Transaction. Furthermore, under the Purchase Agreement, each party’s obligation to consummate the DIRECTV Transaction is also subject to the accuracy of the representations and warranties of the other party (subject to certain qualifications and exceptions) and the performance in all material respects of the other party’s covenants under the Purchase Agreement, including, with respect to us, certain covenants regarding the operation of our business prior to completion of the DIRECTV Transaction. As a result of these conditions, we cannot provide assurance that the DIRECTV Transaction will be completed on the terms or timeline currently contemplated, or at all. If such conditions are not fulfilled by the Outside Date or, if for any other reason, the DIRECTV Transaction is not completed on or prior to the Outside Date (as defined in the Purchase Agreement), the Purchase Agreement may be terminated and the DIRECTV Transaction may not be completed.

There is no assurance that we will be able to obtain the required governmental and regulatory approvals to complete the DIRECTV Transaction, which, if delayed or not granted, is likely to delay or jeopardize the DIRECTV Transaction.

The DIRECTV Transaction is conditioned on the expiration or termination of the applicable waiting period (or extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, approval from the U.S. Federal Communications Commission (“FCC”) and possibly the consent of certain other merger control authorities and other governmental entities as set forth in the Purchase Agreement (collectively, “Regulatory Approval”). These governmental and regulatory agencies have broad discretion in administering the applicable governing regulations. As a condition to their approval of the transactions contemplated by the Purchase Agreement, those agencies may impose requirements, limitations or costs or require divestitures or place restrictions on the conduct of our business. The required approvals may not be obtained or the required conditions to the DIRECTV Transaction may not be satisfied, or, even if the required approvals are obtained and the conditions to the completion of the DIRECTV Transaction are satisfied, the terms, conditions and timing of such approvals are uncertain. Any delay in completing the DIRECTV Transaction could have a material adverse impact on our business, financial condition and results of operations.

The DIRECTV Transaction is conditioned on the consummation of a pre-closing reorganization, which requires the completion of transfers of certain assets and liabilities between us and certain of our affiliates, which transfers may require consents from or approval of third parties.

The Purchase Agreement is conditioned, among other things, upon the consummation of a pre-closing reorganization, which requires, among other things, that certain contracts and other assets, rights and liabilities are to be transferred between DISH DBS and certain of its affiliates in connection with the DIRECTV Transaction, as further described in the Purchase Agreement. The transfer of certain of these contracts and other assets, rights and liabilities may require consents or approvals of third parties or provide other rights to third parties.

Some parties may use consent requirements or other rights to terminate contracts or obtain more favorable contractual terms from us, which, for example, could take the form of price increases for services or assets that we require, forcing us and/or our affiliates to either expend additional resources in order to obtain the services or assets previously provided under the contracts or to make arrangements with new third parties. If we do not obtain required consents or approvals, the DIRECTV Transaction may not be completed, or, if completed, we may not be reflective of the currently intended DIRECTV Transaction and we may be required to seek alternative arrangements, which may not come on a timely basis or at all, or be more costly and/or of lower quality.

The termination, modification, replacement or replication of these contracts or permits or the failure to timely complete the transfer or assignment of these contracts could have a material adverse impact on our business, financial condition and results of operations and on the prospects for completion of the DIRECTV Transaction.

We have and continue to incur substantial transaction-related costs in connection with the DIRECTV Transaction. If the DIRECTV Transaction does not occur, we will not benefit from these transaction related costs.

We have incurred and will continue to incur a number of non-recurring costs associated with the completion of the DIRECTV Transaction and the satisfaction of the related closing conditions, which could be substantial. Nonrecurring transaction costs may include, but are not limited to, fees paid to legal, financial, consulting, investment banking and accounting advisors and costs incurred in connection with obtaining required consents or approvals from governmental authorities or contract counterparties. Such costs may be material and could have a material adverse impact on our business, financial condition and results of operations. Furthermore, if the DIRECTV Transaction does not occur in a timely manner or at all, we may not be able to derive any benefit from such costs.

The announcement and pendency of the DIRECTV Transaction could have a material adverse impact on our business, financial condition and results of operations.

The announcement and pendency of the DIRECTV Transaction could cause disruptions in and create uncertainty surrounding our business, including affecting our relationships with respective existing and future customers, suppliers, vendors and employees, which could have a material adverse impact on our business, financial condition and results of operations, regardless of whether the DIRECTV Transaction is completed. In particular, we could potentially lose customers, suppliers or vendors, and new contracts with any of these third parties could be delayed, increased or decreased, and we may lose important personnel as a result of the departure of employees who decide to pursue other opportunities in light of the DIRECTV Transaction.

Additionally, uncertainty about the completion and effect of the DIRECTV Transaction on our business, financial condition and results of operations may impair our ability to attract, retain and motivate personnel until the DIRECTV Transaction is completed. Employee retention may be particularly challenging during the pendency of the DIRECTV Transaction, as employees may feel uncertain about their future roles within each company after the completion of the DIRECTV Transaction. If such employees depart because of issues relating to the uncertainty relating to the DIRECTV Transaction or a desire not to continue to be employees of ours or DTV after the completion of the DIRECTV Transaction, this could have a material adverse impact on our business, financial condition and results of operations.

In addition, we have expended, and continue to expend, significant management resources in an effort to complete the DIRECTV Transaction, which are being diverted from our day-to-day operations and future growth plans. In addition, the failure to complete the DIRECTV Transaction may result in negative publicity and/or a negative impression of us in the investment community and may affect our relationship with employees, customers and other partners in the business community.

As a public company listed on a stock exchange, we may be a target of securities class action and derivative lawsuits which could result in substantial costs and may delay or prevent the DIRECTV Transaction from being completed.

Securities class action lawsuits and derivative lawsuits are often brought against companies that have entered into business combinations or merger agreements or similar agreements. Even if the lawsuits are without merit, defending against these claims can result in substantial costs and divert management time and resources. An adverse judgment in connection with such a suit could result in monetary damages, which could also have a material adverse impact on DISH DBS’s or our business, financial condition and results of operations. Additionally, if a plaintiff is successful in obtaining an injunction prohibiting completion of the DIRECTV Transaction, then that injunction may delay or prevent the DIRECTV Transaction from being completed within the expected timeframe or at all, which could have a material adverse impact on our business, financial conditions and results of operations.

The Purchase Agreement subjects us to restrictions on our business activities prior to the completion of the DIRECTV Transaction.

The Purchase Agreement subjects us and our subsidiaries, particularly DISH DBS, to restrictions on our business activities prior to the completion of the DIRECTV Transaction. The Purchase Agreement obligates us generally to, among other things, operate our Pay-TV business in the ordinary course until the completion of the DIRECTV Transaction and to use our commercially reasonable efforts to preserve a substantially intact business organizations, operations and goodwill of the business and maintain in all material respects commercial relationships.

These restrictions on our business activities may adversely affect our ability to execute certain business strategies outside of the ordinary course of business, including paying dividends or making distributions, pursuing attractive business opportunities, making certain investments or acquisitions, hiring or terminating certain employees, selling, leasing, or licensing material real property, settling litigation matters, entering into certain material contracts, selling assets, engaging in capital expenditures, incurring indebtedness or making changes to its business. Such limitations could have a material adverse impact on our business, financial condition and results of operations prior to the completion of the DIRECTV Transaction.

The risks described above may be exacerbated by delays or other adverse developments with respect to the completion of the DIRECTV Transaction. For additional information, see the complete set of terms and conditions of the DIRECTV Transaction included in the Purchase Agreement.

The Purchase Agreement also obligates us to, among other things, incur certain costs, make substantial investments in the Pay-TV business and take other actions, that absent the Purchase Agreement, we may or may not have taken. Absent certain exemptions in the Purchase Agreement, we are obligated to take such actions regardless if the DIRECTV Transaction is completed. These actions may be different than the historical manner in which we ran the business.

As a holding company, we are dependent on the operations and funds of our subsidiaries.

We are a holding company with no business operations of our own. Our only significant assets are the outstanding equity interests in our subsidiaries. As a result, we rely on cash flows from subsidiaries to meet our obligations, including to service any of our debt obligations. On September 30, 2024, we announced a sale of our Pay-TV business, from which we derive a substantial portion of our cash flow. With the sale of that business, and the interim operating covenants that restrict our access to that cash, we will be required to, among other things, sell our Pay-TV business and transfer at least $400 million of cash (subject to certain upward adjustments) to DTV upon closing of the DIRECTV Transaction and we are prevented from declaring any dividend or otherwise permitting any leakage in excess of $1.520 billion (subject to certain adjustments set forth in the Purchase Agreement, including transaction expenses and certain accrued interest adjustments and adjustments tied to certain key performance indicators) between the signing and closing of the DIRECTV Transaction.

As a result, our ability to fund our Wireless and Broadband Satellite Services business will be limited to by our cash flow from operations and ability to generate capital from our other businesses.

The market price for shares of our Class A Common Stock after the completion of the DIRECTV Transaction 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 our Class A Common Stock.

Upon consummation of the DIRECTV Transaction, we will no longer own the Pay-TV business, but will continue to operate our Wireless and Broadband Satellite Services businesses. Accordingly, after the consummation of the DIRECTV Transaction, our results of operations may be affected by some factors that are different from those currently or historically affecting our results of operations.