Eutelsat forecast sends shivers through satellite markets
PARIS — Eutelsat on May 12 delivered a multiple-warhead bomb to its investors — and by extension to the entire fixed satellite services industry — slashing revenue forecasts on weakness in its data transmissions, U.S. military, consumer broadband and Latin American operations and even in its gilded Hot Bird direct-to-home television business in Europe.
The results, announced after the markets closed in Europe, caused Eutelsat stock to drop 30 percent in trading on May 13. Shares of competitors SES of Luxembourg, Intelsat of Luxembourg and the United States, Inmarsat of London and AsiaSat of Hong Kong were also down sharply.
Eutelsat said its planned capital spending of 500 million euros ($566 million) per year for the coming years would be “substantially” reduced, with details to come in July during the company’s fourth-quarter earnings call. Eutelsat’s fiscal year ends June 30.
It was unclear what committed spending could be reversed on short notice. Eutelsat currently has five satellites on order. The first, Eutelsat 117 West B, is scheduled for launch in mid-June aboard a SpaceX Falcon 9 rocket. The second, the Eutelsat 172B, is scheduled for launch in early 2017 and has been partially booked by Panasonic Avionics for aeronautical broadband service in the Asia-Pacific.
In a brutal quarterly earnings-call baptism as Eutelsat’s new chief executive, Rodolphe Belmer said the company, which has made Latin America a focus of its recent investment, was surprised at the magnitude of the collapse in Latin American data business.
In particular, he said recent Eutelsat satellites launched over Latin America have had much slower take-up rates than predicted, in part because of the arrival of high-throughput satellites operated by competitors Intelsat and Telesat.
Belmer said Eutelsat’s high-throughput satellite investment would remain limited to consumer and small-business broadband services because the outlook for data delivery is bad.
Even operators of high-throughput satellites are likely to feel the pain, Belmer said, as the hoped-for new business generated by these satellites’ low per-megahertz prices has not yet materialized.
Paris-based Eutelsat is the world’s third-largest commercial satellite fleet operator when measured by revenue. Two-thirds of its business is in television delivery, a sector that continues to grow as broadcasters move from standard- to high-definition programming, and soon to ultra-high-definition television.
In Eutelsat’s case, this business has long counted on the highly profitable Hot Bird fleet over Europe. But even this business is showing signs of strain as Eutelsat’s Hot Bird distributors have trouble selling the capacity for which they had contracted.
Worried that these companies would cut prices to sell the bandwidth, Eutelsat is taking back capacity from under-performing distributors to maintain the premium that the Hot Bird fleet has always been able to charge by virtue of the television lineup already on board.
While Hot Bird remains “the jewel in the fleet,” Belmer said, Eutelsat has developed mini-Hot Bird-type orbital slots at 7 and 8 degrees west in Arabic nations; at 7 degrees East over Turkey; and among Russian broadcasters at 36 degrees East and 56 degrees East.
An African direct-to-home business is showing progress at 16 degrees East.
Belmer said pricing in these regions started low and are now beginning to rise with the virtuous-circle effect of more broadcasters with more programming attracting more viewers, which in turn attract more broadcasters on Eutelsat satellites.
Eutelsat’s business with government customers, mainly the U.S. Defense Department, has shown softness with the reduced U.S. troop presence in Iraq and Afghanistan. But the company had hoped that its increasingly global presence would help stabilize this business.
That has not happened yet. Eutelsat Deputy Chief Executive Michel Azibert said during the conference call that in the latest round of contract renewals, the U.S. Defense Department negotiated prices that were 65 percent of the levels of similar capacity contracted five years ago.
Azibert said the U.S. military’s “tougher procurement process and the competitive intensity” on evidence in the latest bidding round have lowered prices but not materially affected Eutelsat’s share of the total business. He said the company succeeded in winning 85 percent of its previous contracts.
Eutelsat’s results were the first concrete evidence of the early effects on the existing market of high-throughput satellites, whose multiple spot beams permit the reuse of radio frequency to offer much lower-cost bandwidth compared to conventional wide-beam satellites.
That allows fleet operators to sharply reduce the per-megahertz cost of bandwidth. The fear has been that this new technology will render obsolete much of the wide-beam capacity and cannibalize business in those companies operating high-throughput satellites alongside traditional spacecraft.
This thesis has been most publicly advanced by ViaSat Inc. of Carlsbad, California, which is fielding several high-throughput Ka-band satellites for global broadband connectivity and does not have a legacy business with conventional satellites.
ViaSat has said, in effect, that the traditional satellite industry cannot adopt the new technology because it would accelerate the collapse of much of this industry’s existing business.
Other satellite operators have countered that the lower per-megahertz prices would stimulate new users of satellite bandwidth – including the Internet of Things, aeronautical and maritime mobility and the connected car — that ultimately will outweigh the initial loss in revenue.
Intelsat and Telesat both launched high-throughput satellites serving Latin American in recent months.
Belmer agreed that the idea behind high-throughput satellites is to grow the satellite sector into areas that heretofore have not been customers.
“That is the theory,” Belmer said. “For the moment, that’s not what we see in the field. I cannot give you positive elements on that front.”
He said Eutelsat’s high-throughput investment would be limited to providing broadband access to consumers and small businesses, even though the company’s first endeavor in this sector, with the Ka-Sat satellite, has stopped growing because of a lack of capacity in high-demand regions of Britain and France.
Ka-Sat subscribers totaled 185,000 as of March 31, down from 190,000 on Dec. 31. Eutelsat still has not announced how it will add capacity to resume growth. No satellite has been ordered.
Belmer said Eutelsat would disclose to investors in July the measures it will take to better position itself in the market.
“We have taken the full measure of the factors leading to an industry-wide slowdown in momentum,” Belmer said. “We are adapting to this environment with a wide-ranging review of our organization and of our strategic priorities, which will notably include a downward review of our capital expenditures.”