What’s SES doing with its $1.6-billion satellite investment war chest?

by

PARIS – Satellite fleet operator SES on July 29 said the cash it has set aside for new satellites may be spent as much on additional satellites for its just-acquired O3b Networks medium-Earth-orbit constellation as on a global Ka-band mobile broadband constellation in geostationary orbit to rival competitors ViaSat and Inmarsat.

Luxembourg-based SES had long been expected to use its substantial cash war chest – 1.47 billion euros ($1.6 billion) in yet-uncommitted satellite spending between now and 2020 – for a global geostationary-orbit broadband constellation.

SES for months has been rumored to be in discussions with various partners, including EchoStar of the United States, aeronautical entertainment provider Thales Live TV and satellite builder Thales Alenia Space, about whether to commit to such a system.

The idea is to provider a higher-throughput broadband system than what’s offered today by London-based Inmarsat’s Global Xpress network, and to beat Carlsbad, California-based ViaSat Inc. to the market. ViaSat is planning a global terabit-per-satellite constellation that could be in service around 2020, but has not yet been fully funded.

In a July 29 conference call with investors, SES Chief Executive Karim Michel Sabbagh repeatedly stressed that, as of Aug. 1, SES owns an asset that has no equivalent among the company’s competitors: the 12-satellite O3b.

Operating in equatorial orbit covering an area around 45 degrees north and south of the equator, O3b delivers high-throughput, low-latency Ka-band connectivity to remote island nations, maritime customers, offshore energy producers and other customers. The company has eight more satellites under construction.

Aug. 1 payday for O3b shareholders Google, HSBC, Liberty Global et al

SES assumed 100 percent ownership of O3b on Aug. 1, paying $722 million for the 50.9 percent of the company it did not already own to O3b investors HSBC, Liberty Global, Google, Development Bank South Africa, Satya Capital, Allen & Co and Next Bridge Venture Partners.

Sabbagh said O3b’s full presence inside SES councils is affecting how the company thinks about broadband delivery. He said ongoing research and development on a universal payload adaptable to O3b and geostationary-orbit satellites means a future high-throughput satellite (HTS) strategy could feature a blend of investment in O3b and geostationary assets.

“There is going to be a very relevant discussion about the most efficient way to deploy HTS payloads,” Sabbagh said. “We have, uniquely, the option to deploy in both the GEO and MEO arcs. And because we’re also working on unifying the terrestrial segments, starting with the antennas, we’ll be in a position to decide the optimum way to deploy these payloads. This certainly applies to Ka-band.”

The current capital spending reserve does not include planned investment in O3b, and until recently, “for Ka-band our natural thinking would have led us to does this in GEO,” Sabbagh said.

“Increasingly, we’ll be inclined to consider that MEO may be a more efficient way of doing it, with more-relevant performance for end users – improved bandwidth, latency and economics. As we deploy the payloads on a MEO arc, the economics are more favorable,” he said.

SES officials have said since they became a major O3b shareholder that the MEO architecture – unlike many low-orbit-constellation designs — allows the system to generate revenue with only a few satellites, with additional spacecraft added as the revenue opportunities merit. Ultimately more than 100 satellites could be part of the constellation.

O3b has rapidly grown the revenue it generates from leisure-cruise operators, notably Royal Caribbean, which has installed O3b antennas on 11 large cruise ships. SES said that since early 2015, O3b has increased its maritime revenue by 78 percent, albeit from a small base.

SES said O3b revenue between August and December of this year should total 45 million euros. For the entire year, O3b is expected to report more than $100 million in revenue, double that of 2015. O3b’s revenue for the three months ending March 31 was 18 million euros; for the three months ending June 30, it was 22.1 million euros.

As of June 30, O3b backlog stood at $360 million.

SES Chief Financial Officer Padraig McCarthy said O3b reported positive EBITDA, or earnings before interest, taxes, deprecation and amortization, in May and June and would be adding to SES’s overall earnings by 2018.

O3b fits into the SES portfolio in two man areas – the struggling enterprise-data market, where O3b’s unusual service offer could stem the ongoing decline; and in mobility. O3b has boosted its maritime revenue by 78 percent since early 2015, SES said.

Mobility is the new star at SES

Mobility has become SES’s star performer in terms of revenue growth even before integrating O3b, growing by nearly 50 percent, to 44.5 million euros, in the six months ending June 30 compared to a year ago.

SES has been particularly successful in the aeronautical in-flight connectivity and in-flight entertainment sectors, booking contracts with Panasonic Avionics, Gogo and Global Eagle Entertainment (GEE).

GEE has recently purchased maritime connectivity and entertainment provider MTN and has said the merged company would consolidate its satellite bandwidth purchase.

MTN has been a large customer on Intelsat’s fleet. GEE has been more of an SES customer. Sabbagh said he was confident that SES would come out a winner in the consolidation. It remains unclear how many years MTN has remaining on its Intelsat contracts, and whether the early-cancellation penalties would be offset by the savings.

Imminent contract from U.S. Central Command?

SES and O3b officials have said they are nearing a sizable contract with the U.S. Defense Department Central Command for O3b capacity. Sabbagh said an announcement was expected in the coming weeks.

He declined to specify its size, but said: “Given the nature of the O3b solution and the nature of the client, that’s going to be quite significant capacity that will be provided from the starting bloc.”