Intelsat Feeling Sequestration’s Pinch

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PARIS — Satellite fleet operator Intelsat on May 9 added its name to the list of commercial satellite owners whose business is feeling the effects of forced U.S. government spending cuts, known as sequestration, saying its government business would almost certainly shrink this year compared to 2012.

In a May 9 conference call with investors, officials from Luxembourg- and Washington-based Intelsat said that so far, the reductions in U.S. military spending on commercial satellite bandwidth have mainly affected Intelsat’s “off network” revenue, meaning contracts managed by Intelsat that feature satellite capacity provided by other fleet operators.

This business, which includes mobile satellite services, transponder capacity and hardware sales, dropped by 17 percent, to $61.8 million, in the three months ending March 31 compared to a year ago. Intelsat Chief Financial Officer Michael McDonnell said the decline in off-network revenue is exaggerated because of $10 million hardware sales a year ago that did not recur.

Intelsat Chief Executive David McGlade said there is no guarantee that this low-margin off-network business would remain the focus of defense-spending cutbacks. It is just as likely, he said, that the more profitable capacity provided by Intelsat’s own fleet to the U.S. military would be hit in the coming months.

McGlade said between 50 and 60 percent of Intelsat’s government business is conducted using Intelsat’s own satellites. The high percentage of non-Intelsat capacity in government contracts managed by Intelsat helps explain why U.S. government business accounts for 19 percent of Intelsat’s total revenue but only 13 percent of its earnings before interest, taxes, depreciation and amortization (EBITDA).

McGlade sought to portray the government business decline as ultimately good news for Intelsat and other commercial satellite owners insofar as it may compel the U.S. Defense Department to ratchet up its use of commercial satellite bandwidth, or military payloads hosted on commercial satellites, rather than build its own satellites.

But he conceded that only a minority of Intelsat’s government business goes to serve “mission-critical” military needs. 

The other business line that is declining is what Intelsat calls its “channel” capacity, which is mainly point-to-point services whose customers are migrating to fiber-optic cable. The channel business, which uses Intelsat’s fleet and has been declining for several years, fell another 19.5 percent in the first three months of 2013 compared with a year ago, to $19.2 million.

Despite the drag from the channel business, Intelsat’s overall business using its own satellites grew by 4 percent in the quarter, to $593.3 million. The media services business line grew 6 percent, to $223 million.

Intelsat’s total revenue for the three months ending March 31 was $655.1 million, up 1.7 percent from a year ago. Backlog at March 31 stood at $10.4 billion, down 3 percent from where it was Dec. 31. McGlade pointed to the lower U.S. government business as the main reason for the drop in backlog. 

The company’s EBITDA was 77 percent of revenue, and the fill rate on its 2,175 transponders was 78 percent. The fill rate does not include satellites that, to save fuel and extend their service lives, are no longer stabilized on their north-south axis.

Intelsat completed its long-delayed stock-market introduction in mid-April, raising a net $550 million on the New York Stock Exchange. The proceeds, and $491 million in insurance claims Intelsat has recently received from the partial failure of the IS-19 satellite and loss of the IS-27 satellite to a launch failure, are being used to reduce Intelsat’s sizable debt load.

Intelsat paid $318 million to service its debt in the three months ending March 31. McDonnell said the insurance payments and the stock proceeds, combined with the current low interest rates, have enabled the company to cut its debt-to-EBITDA ratio to 7.55 from 7.85.

Intelsat expects 2013 to be an exceptional year in terms of expected customer prepayments. The company received $22 million in prepayments in the first three months of the year, and expects up to $200 million for the year as a whole. That will drop to up to $150 million in 2014 and $50 million in 2015.