Intelsat: Early signs say industry favors long-term return over short-term market share

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PARIS — Satellite fleet operator Intelsat on Oct. 27 said the global satellite bandwidth pricing environment appears to be stabilizing as satellite owners stop short of an all-out price war.

In a conference call with investors, Intelsat Chief Executive Stephen Spengler said it was too early to declare that prices, especially for data-centric applications, have reached bottom. He said Intelsat has several large contract renewals coming up in 2017 and that there’s no predicting where they will end up.

Nonetheless, Spengler — who as a rule does not overly sugarcoat business trends — said there are indications that some satellite owners are aware of the need to price for long-term survivability, and not short-term market share.

For the company’s Network Services business, which has been battered by the decline in transponder prices, “we actually see flatness in that stabilization,” Spengler said.

“That’s a good indication in our mind. It may be that we’ve reached a point where all operators realize that it’s important to make sure that they address their business cases’ IRRs [internal rates of return] and that there’s maybe a little bit more discipline across the industry in that regard.”

It’s a delicate balance for a company like Intelsat and other operators that, in addition to maintaining a large fleet of wide-beam satellites, are now fielding high-throughput (HTS) spot-beam spacecraft and trumpeting their lower cost per megabit.

Short-term pain is certain; long-term gain is the goal

The thesis is that the lower prices will generate growth in aggregate demand as heritage customers buy more bandwidth and new markets open because of the lower-cost capacity.

Whether this thesis will prove accurate will take time to determine. For now, these new satellites are putting more downward pressure on conventional satellites than they are stimulating new business volume.

Luxembourg- and McLean, Virginia-based Intelsat has launched the first two of a planned seven Epic-class satellites whose sales pitch is exactly that: materially lower bandwidth cost compared to conventional satellites, including most of Intelsat’s fleet.

Two Epic satellites are in orbit. The second, Intelsat 33e, suffered a failed thruster and is taking longer to reach its operating position than expected but is otherwise healthy. It is expected to start operations in early 2017.

Three more Epic spacecraft are scheduled for launch in 2017.

For the three months ending Sept. 30, Intelsat reported Network Services revenue of $222 million, down 16 percent from a year ago and down 3 percent from for the three months ending June 30.

The company had warned the market that Network Services declines would continue, which is why Spengler’s suggestion that the worst of the news was behind it was important.

Spengler said the average Network Services contract is for three years. Given the volume of business whose contracts are up for renewal in 2017, he cautioned that there is no telling where these renewals will end up.

Government revenue surprisingly strong

Intelsat’s Government division, like Network Services, has been declining but for different reasons. U.S. military commitments have reduced in size, and the U.S. Defense Department has not issued many new contract proposals.

Given that background, the 2 percent growth in Intelsat’s government revenue, to $97 million for the three months ending Sept. 30, was a surprise.

The company reported “extremely high” renewal rates among its government customers but did not specify specific renewal-contract volumes or whether the transponder prices inside them were stable or declining.

Intelsat said 59 percent of its government business is “on-network” revenue, meaning derived from capacity on Intelsat’s fleet. The remaining 41 percent is lower-profitability revenue from capacity that Intelsat books on other operators’ fleets as part of a bundled contract to government customers.

Intelsat recently lost a U.S. Navy contract for a patchwork of coverage to London-based Inmarsat, in part because Inmarsat offered far lower prices.

Intelsat sought to argue that the pricing levels were unrealistic and masked defects in its competitor’s bid, notably with respect to the customer’s original coverage specifications.

But the contract, called the Commercial Satellite Broadband Program, or CSBP, was definitively awarded to Inmarsat. Intelsat said the customer recently gave Intelsat a two-month extension on the contract, apparently to give time to Inmarsat to prepare. The contract is now scheduled to end on Dec. 31.

“We see increasing use of ‘lowest-price, technical acceptable’ evaluation formats for awards of new business” from the U.S. government, Intelsat said.

Bad debt still an issue

Intelsat reported total revenue of $543 million for there three months ending Sept. 30, down 7 percent from the same period a year ago. Adjusted EBITDA, or earnings before interest, taxes, depreciation and amortization, was 75 percent of revenue, down from a 79 percent margin a year ago.

Intelsat Chief Financial Officer Jacques D. Kerrest said the EBITDA decline was in part due to persistent bad-debt accounts, mainly in Latin America, a problem that Intelsat had noted earlier in the year. Kerrest said that for the first nine months of 2016, Intelsat is down about $14 million because of bad debt compared to the same period in 2015.