Inmarsat Profits Pinched by Sudden Drop in U.S. Government Business

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KOUROU, French Guiana — Mobile satellite services operator Inmarsat on May 2 reported a 2.4 percent increase in revenue for the three months ending March 31 but said a “sudden and pronounced deterioration” in its U.S. government business caused a drop in gross profit.

London-based Inmarsat said the U.S. government issues related to the automatic spending cuts known as sequestration may continue for the rest of the year.

But in a May 2 conference call with investors, Inmarsat Chief Executive Rupert Pearce sought to portray the company’s U.S. government work as solid over time once the “short-term blip” of the budget turmoil has passed.

Inmarsat is counting on its Global Xpress service, a Ka-band broadband capacity to be commercialized from three satellites to be launched by late 2014, to lock in U.S. Defense Department business over time.

Inmarsat is able to offer global roaming to its customers, including the U.S. government, which means subscribers can access bandwidth no matter what their location.

“They can take their needs with them” without having to negotiate new capacity from region to region, Pearce said. “It doesn’t matter if they pivot from the Middle East to the Asia-Pacific. We’re there anyway.”

Inmarsat operates a fleet of satellites using L-band for generally lower-speed links to maritime, land-mobile and aeronautical customers worldwide, except for the poles.

Like other mobile satellite services providers, the company’s revenue moves up and down with the frequency of wars and natural catastrophes that cause usage spikes in a given area. In the case of U.S. and allied governments’ use of Inmarsat services in Afghanistan, what started as a temporary event turned into a decade-long source of revenue.

That business is now declining with troop withdrawals from Afghanistan. The French military incursion into Mali in January generated a bit less than $2 million in first-quarter revenue, not enough to compensate for the steady drop in Afghanistan and Iraq.

But it is not the Afghan situation that bit into Inmarsat’s first-quarter performance. Instead, it was the managed network services run by what used to be called Segovia before Inmarsat’s purchase of that company. This business is a retail reseller of Inmarsat and other satellite capacity that it leases from Ku-band satellite operators and bundles into turnkey services for government customers.

Pearce said that despite this business’ current problems, Inmarsat is not going to walk away from it, especially since over time it could help move U.S. Defense Department customers to the Global Xpress service.

Inmarsat is working a parallel move on the commercial side through its acquisition of ShipEquip, which provided Ku-band capacity from other satellite operators to ship fleets that have VSAT, or very small aperture terminals, installed on their decks.

Through its XpressLink service, Inmarsat offers packages that include the Ku-band VSAT service, with capacity bought from other satellite operators, and Inmarsat’s own FleetBroadband L-band service.

The XpressLink customers agree to be moved to GlobalXpress once that service is available. Global Xpress is designed to offer customers higher throughput rates at lower cost per megabyte than they are paying for Ku-band services.

The first of the three all-Ka-band Global Xpress satellites is scheduled for launch late this year on an International Launch Services Proton rocket. The two remaining spacecraft are to be launched, also on Proton vehicles, in 2014.

Pearce and Inmarsat Chief Financial Officer Rick Medlock said during the conference call that Inmarsat would be looking at ways to cut costs in its managed services business to the U.S. government without reducing the division’s head count.

Inmarsat’s leasing business, which in the past has also benefited from U.S. government demand, was down nearly 18 percent, to $20.9 million.

Inmarsat’s other businesses appeared to perform in line with the company’s previous forecasts. The long slide in its land-mobile voice business, which the company hoped to address with the introduction of its new IsatPhone Pro hand-held device, has reversed. Land-mobile voice revenue was up 69 percent, to $4.4 million, in the three months ending March 31 compared with the same period a year ago.

Inmarsat said it added 5,000 IsatPhone subscribers during the quarter, for a total of 90,000 as of March 31.

The company’s key maritime communications segment reported a continued slide in voice revenue, down 14 percent to $18.4 million, but a sharp increase in data revenue, which was up 15.3 percent to $85.3 million.

Pearce conceded that part of the maritime data revenue increase was due to a price increase in the FleetBroadband service that took effect in May 2012, giving the first-quarter 2013 results a one-time lift when compared to a year ago.

Aeronautical mobile communications was up 15.4 percent to $27.7 million on the strength of the SwiftBroadband service.

Total Inmarsat revenue for the quarter was $310.8 million, up 2.4 percent from a year ago. EBITDA, or earnings before interest, taxes, deprecation and amortization, was down 2.2 percent, to $154.2 million, mainly because of the U.S. government business drop. 

 

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