Eutelsat defends return to growth strategy with recent video wins

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WASHINGTON — One year after giving a whiplash-inducing revision to revenue forecasts from growth to contraction, French satellite operator Eutelsat hit the markers it set out for a return to growth by 2019.

Speaking to investors July 28, Eutelsat CEO Rodolphe Belmer said the operator’s strategy to curb costs and increase free cash flow are working effectively, reinforced by contract renewals with major broadcasters Arqiva in the United Kingdom and Digiturk in Turkey that both came with “favorable terms.”

Those contracts, plus an uptake in transponder-hungry high definition channels at a pace that surpasses the adoption of bandwidth-saving video compression standards, backed Eutelsat’s stance that video, its largest customer set, will remain a dependable source of revenue as the operator gears up for new long term opportunities in satellite broadband.

Eutelsat reported 1.478 billion euros ($1.75 billion) in revenue for its fiscal year 2016/2017, which ended June 30, a decrease of 2.2 percent from the previous fiscal year. That is squarely in the middle of the company’s expected decline of 1 to 3 percent announced in May of 2016, when the company reversed prior projections of 4 to 6 percent growth.

Discretionary free cash flow increased by 65 percent to 407.8 million euros, and capital expenditures, or capex, decreased year-over-year by 100 million euros to 414 million euros. Belmer said the company would target 420 million euros in capex for fiscal year 2017/2018, and would extend that goal for the following fiscal year.

Eutelsat’s EBITDA, or earnings before interest, taxes, depreciation and amortization, stood at 1.134 billion, down by 2.7 percent. Net income increased by 0.9 percent to 352 million euros, but the company’s backlog declined by 7.6 percent to 5.2 billion euros.

“Following our performance in 2016 and 2017, all the elements in our financial outlook are either maintained or raised,” Belmer said. “We continue to target broadly stable revenues in fiscal year 2017/2018.”

Eutelsat eliminated around a tenth of its roughly 4 billion euro debt during the fiscal year, reducing it to 3.641 billion euros through discretionary free cash flow and money from the sale of its 70 percent stake in maritime connectivity provider WINS to Speedcast in August 2016. The fleet operator also reduced its export credit financings and financial leases by 140 million euros.

Video Applications, which represent roughly two thirds of Eutelsat’s business, saw a 3.3 percent decrease in revenue to 908 million euros, with broadcast revenues contracting by 2.2 percent. Eutelsat said that lower revenues from Fransat and a capacity reduction from the end of a TV d’Orange contract stunted what otherwise would have been growth in broadcast revenues of 2.7 percent.

Eutelsat added 288 new television channels on its satellites, reaching 6,630 total. HD channels now count for 17.2 percent of all channels broadcasting on the Eutelsat fleet. Belmer said the operator now has five ultra-HD channels as well, and expects that number to reach 20 in five years.

Michel Azibert, Eutelsat’s deputy chief executive and chief commercial and development officer, said that the operator’s recent contract renewal with Arqiva came with better pricing for Eutelsat at the same volume of capacity. The renewal with Digiturk, Turkey’s largest pay-TV provider, secures Eutelsat business “in a difficult political and economic context,” given the failed coup last year and ensuing unsettled political environment there.

Belmer used both deals to affirm Eutelsat’s stance on the health of the broadcast business overall.

“[It] is a sign that what we have been consistently saying, that our video business is resilient and has room for slight growth going forward. It’s proven,” he said.

Broadband opportunity

For fiscal year 2018/2019, Belmer said he expects a return to slight growth before seeing a “step up in connectivity revenues.” Eutelsat’s fixed broadband and mobile broadband, collectively just 12 percent of revenues, grew by 18.4 and 22.5 percent respectively over the year. Aeronautical broadband customers Gogo and Panasonic Avionics both increased their capacity commitments. Eutelsat also resold the majority of the capacity from a cancelled deal with Bras Trading, a Florida-based company that wanted to do aero-broadband in Brazil, to Taqnia Aerospace in Saudi Arabia for inflight connectivity across Europe, the Middle East and Northern Africa.

Belmer said Konnect Africa, Eutelsat’s sub-Saharan Africa focused satellite broadband initiative, is progressing well since replacing the capacity leased from Israeli satellite operator Spacecom on the lost Amos-6 with capacity on Yahsat satellites. The venture, which started service in June, is not generating much revenue yet, he said, but is in line with Eutelsat goals and should “accelerate quite significantly during the course of fiscal year ’18.”

Belmer said Eutelsat’s broadband joint venture with ViaSat, which involves Eutelsat cofinancing the second ViaSat-3 satellite and ViaSat paying for nearly half of Eutelsat’s Ka-Sat, is up and running with a joint team in Lausanne, Switzerland. He said Eutelsat is still negotiating with ViaSat on technical and financial elements of the next steps in the joint venture.

Along with the joint venture, Eutelsat is also part of ViaSat’s team in a legal battle over the legitimacy of fleet operator Inmarsat’s use of a European Commission S-band mobile satellite services spectrum license for a terrestrial air-to-ground network across Europe. Belmer said Eutelsat believes it has a very strong case that Inmarsat’s application of the license “was a distortion of usage.”

Eutelsat feels strongly convinced to the point that the company “must prepare to be engaged into litigation at local level if needed,” he said.

Inmarsat launched an S-band payload to compliment the air-to-ground network in June. Frederik van Essen, Inmarsat Aviation’s senior vice president of strategy, described the allegations as “entirely without merit and fundamentally misconceived,” during a June interview with SpaceNews.