Eutelsat Lowers Forecast on Reduced DoD Spending, Heightened Competition in Africa

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PARIS — Satellite fleet operator Eutelsat on May 7 cut its expected rate of growth in the coming three years because of heightened competition in Africa from fiber lines and new satellite operators, and reduced U.S. Department of Defense (DoD) spending on commercial bandwidth.

Average annual revenue growth between 2012 and 2015 will be 5-6 percent, down from the 6-7 percent the Paris-based operator had previously forecast.

In a May 7 conference call with investors, Eutelsat officials said the seven satellites the company expects to launch between 2013 and 2015 should ultimately accelerate revenue growth, especially in the Middle East, North Africa and Russia. 

The dip in Africa is temporary, they said, and the company is redirecting its commercial effort in the region toward corporate networks and mobile applications, both of which are expected to grow even as point-to-point communications migrate to competing providers.

Citing one market forecast, Eutelsat Chief Executive Michel de Rosen said the number of VSAT, or very small aperture satellite terminals, in Africa is expected to climb to 230,000 in 2021 from 65,000 in 2011.

The DoD’s demand for commercial satellite capacity is harder to evaluate. Eutelsat Deputy Chief Executive Michel Azibert said the core demand for bandwidth for intelligence, surveillance and reconnaissance platforms, particularly unmanned aerial vehicles, will remain strong. 

But nonessential communications such as troop entertainment and so-called welfare services have already been cut under the U.S. budget process known as sequestration, which forces mandatory cuts in programs.

Azibert said that in the latest biannual contract renewal period with the DoD, which occurred in February and March, transponder prices held steady but the total volume of contracted capacity fell by about 20 percent. 

“There was no price impact, but a relatively severe volume impact,” Azibert said during the conference call.

Eutelsat sells capacity to the DoD through intermediaries and resellers who bundle it in their own way, making it difficult for Eutelsat to determine the exact application of each megahertz that is sold. But Azibert estimated that more than 75 percent of Eutelsat’s ongoing revenue from the DoD is for essential services that are likely to survive the longer-term budget cuts.

Eutelsat’s capacity over the Middle East, Central Asia and South Asia, and more recently over the Asia-Pacific region, has given it a steady and growing revenue stream from the U.S. military. But in recent months, the pullout from Iraq and Afghanistan, and more recently the budget cuts and sequestration, have chipped away at this revenue source.

For the three months ending March 31, Eutelsat’s Multi-Usage revenue line, where the defense revenue is centered, dropped by 3 percent, to 108.1 million euros ($140.5 million), compared with last year. The decline was 4.4 percent in the three months ending March 31 compared with a year ago.

Azibert said the U.S. military’s use of Eutelsat satellites at 10 degrees east, 36 degrees east and 8 degrees west declined in recent months.

Market demand for bandwidth on Eutelsat’s two newest satellites, Eutelsat 70B and Eutelsat 21B, has been less strong than expected, de Rosen said.

Eutelsat’s core business of selling satellite capacity for television distribution, which accounts for 69 percent of the company’s revenue, grew by 2.6 percent, to 216.4 million euros, in the three months ending March 31 compared with a year ago.

The company’s fleet of more than 30 satellites hosted 4,638 television channels as of March 31, up 9 percent from a year ago. Of these, 434 were high-definition (HD) channels. HDTV channels are now 9.4 percent of Eutelsat’s channel count, up from 7.8 percent a year ago.

Eutelsat and other commercial fleet operators view the growth of global demand for HDTV, which requires double the satellite bandwidth of standard-digital channels, as a guarantee of market health in the coming years. Eutelsat and others are now introducing ultra-HD as television set manufacturers develop products, and hope this transmission standard wins market approval as well.

Eutelsat’s move into consumer satellite broadband through its all-Ka-band Ka-Sat, which entered service in mid-2011, has been a struggle. But de Rosen said a new Ka-Sat commercial offer introduced in February has been a success.

Ka-Sat consumer broadband revenue is reported in Eutelsat’s Value-Added Services business line, which grew 8.9 percent in the three months ending March 31, to 14.1 million euros. Eutelsat declined to detail the Ka-Sat business performance in terms of subscriber count or monthly subscriber revenue.

Total Eutelsat revenue for the three months ending March 31 was 322.9 million euros, up 4.6 percent year on year. The company said it expects its EBITDA, or earnings before interest, taxes, depreciation and amortization, to be 77.5 percent of revenue for the fiscal year ending June 30.