Updated at 11:58 a.m. EDT
PARIS — Satellite fleet operator Intelsat on Oct. 1 warned investors that the usual end-of-fiscal-year spike in U.S. Defense Department spending on satellite bandwidth will be absent this year with U.S. government budget cuts and the shutdown of government spending.
Addressing an investor conference organized by Deutsche Bank, Intelsat Chief Executive David McGlade said the Pentagon’s Defense Information Systems Agency (DISA) has not proceeded with its usual end-of-year purchase of satellite capacity because of the budget crisis in Washington.
The U.S. government’s fiscal year ends Sept 30. Like other U.S. government agencies, DISA must spend its annual budget allocation by the end of the year or lose it. That typically creates an end-of-year increase in spending on short-term capacity that has benefited Intelsat and other commercial satellite fleet operators.
That will not happen this year, McGlade said. While not providing indications of Intelsat’s revenue for the third quarter — the three-month period ending Sept. 30 — McGlade said the U.S. government’s budget crisis remains a drag on Intelsat’s financial performance.
“I do not see, in the short term, any improvement in the situation,” McGlade said.
Luxembourg- and Washington-based Intelsat generates about 19 percent of its annual revenue from sales of satellite capacity to the U.S. government, mainly the Defense Department. Nearly half of this revenue is from contracts that are managed by Intelsat but involve the use of bandwidth provided by other satellite operators.
On these contracts, Intelsat typically books a gross profit margin of no more than 20 percent, compared with its overall EBITDA — earnings before interest, taxes, depreciation and amortization — margin of 75-80 percent.
McGlade said Intelsat has grown accustomed to U.S. government budget traumas in the past couple of years — including the across-the-board budget cuts known as sequestration and now the broader shutdown of U.S. government spending — and will ride out the current crisis as it has the others.
Over time, he said, the U.S. government likely will be won over by the argument of Intelsat and other satellite fleet operators that longer-term contracts are more cost-effective for the U.S. government as a customer, and also provide the revenue predictability that companies like Intelsat want to show investors.
McGlade said the Defense Department was “in denial” in early 2012 about the effects of sequestration and as a result was forced to make drastic cuts to spending late in the fiscal year. Intelsat and other commercial fleet operators have said that, over time, U.S. defense authorities will more fully engage with the commercial sector in seeking ways to cut the cost of bandwidth.
Intelsat conducted an initial public offering (IPO) of stock in April. Analysts have been speculating as to when the company’s private-equity owners, who purchased Intelsat some five-and-a-half years ago, would use the company’s equity to effectuate a partial cash-out.
McGlade said Intelsat’s owners “didn’t take a penny” from the IPO and appear to have placed their expectations for a payout on the stock’s appreciation. “Doing anything that would damage the share price would not be in their interests,” McGlade said.
Intelsat Chief Financial Officer Michael McDonnell told the investor conference that the company’s most immediate priority is reducing its debt, which is now equivalent to about 7.5 times its EBITDA.
Ultimately, McDonnell said, Intelsat would be comfortable with a debt level of between five and six times its annual EBITDA. Getting to that point will mean removing another $3 billion to $4 billion of debt from the company’s ledgers, a process, he said, that will take several years.
McDonnell said Intelsat’s current fleet of 41 fully operational satellites plus 11 in inclined orbit — aging satellites often are operated in inclined orbits to extend their lives — includes about 35 key orbital positions. As Intelsat moves to higher-throughput satellites in its Epic series, the number of satellites in the fleet may be reduced, he said.
But even reducing the fleet to those slots viewed as key moneymakers will require $700 million to $750 million in annual capital spending, he said.
McDonnell said that by Intelsat’s calculation, the company’s capital spending on satellites over the past decade has averaged about 26 percent of annual revenue, versus 38 percent for Eutelsat of Paris and 40 percent for SES of Luxembourg, respectively the world’s third- and second-largest commercial operators after Intelsat.
During the 10-year period in question, Intelsat has proceeded with two large acquisitions of other satellite fleets, whereas SES and Eutelsat have relied more on organic growth. Acquisitions are not counted as capital spending.